It is interesting that this setup in which people buy stocks but do not actually own them started in the 1970's and I don't recall ever hearing about it until I saw the story on Fox's site today.
We have no more 401K or other retirement accounts and do not invest in the stock market, except for a couple share of IBM I bought years ago when I worked there.
So we're covered as I see it. We only use banks with money in savings, checking and CD accounts.
Whether the market as a whole is structured around direct "ownership" of share or via a central well established custody system - it's functionally identical risk. You're counting on rule of law. And not just you - everyone. If it works it works, or it doesn't in which case the global financial system crashes and we've all got bigger problems. Also custody <> ownership.
Nor can any of this seize retirement savings:
>may seize securities used as collateral in lending arrangements with broker-dealers.
i.e. no different from bank seizing your house if your mortgage arrangement blows up.
The broker using your stocks as collateral doesn’t mean they can seize your stocks. It means they can borrow against your stocks to get liquidity and if there was some sort of total meltdown and they went out of business, your stocks might hypothetically be part of the bankruptcy waterfall.
Which isn’t a great position to be in but, it’s worth making a few observations:
1) Even if your stocks went into the bankruptcy waterfall, you would have a very preferential place in that waterfall so you are highly likely to get paid in full. If you’re in the waterfall your claim is settled using all remaining assets of the bank, not just your savings. The people who made loans to them with your savings as collateral would be behind you in the waterfall most importantly, so they wouldn’t get dollar 1 until you were 100% paid in full.
2) To actually be worse off here (even notwithstanding #1) you’re really looking at some hypothetical financial meltdown where the banks go completely out of business and yet somehow your retirement savings are still worth something. It might not be a very reassuring thought but that’s not a very likely scenario is it?
3) When a broker dealer goes bust even if your assets are totally in segregated funds you don’t get paid back for frikkin’ ages. A person I know had Lehman as the prime broker for their hedge fund and they didn’t get access to their assets for I want to say a year or so.
The clearinghouse in question has wide latitude, broad mechanisms, and constant aggressive risk management available to manage high volatility market conditions without impacting individual ownership, this is fear driven propaganda.
According to this, this is total FUD. In case of a liquidation, security entitlement holder has priority over secured creditors, who have priority over unsecured creditors.
Since the title is linkbaity and there have been objections to it as misleading*, I've taken a crack at replacing it with a more neutral, and hopefully more accurate, sentence from the article.
9 comments
[ 2.7 ms ] story [ 26.9 ms ] threadIt is interesting that this setup in which people buy stocks but do not actually own them started in the 1970's and I don't recall ever hearing about it until I saw the story on Fox's site today.
We have no more 401K or other retirement accounts and do not invest in the stock market, except for a couple share of IBM I bought years ago when I worked there.
So we're covered as I see it. We only use banks with money in savings, checking and CD accounts.
Is there a better source for this? I couldn't bring myself to click "Read More" after the intro paragraphs had such a terrible framing of the DTC.
Whether the market as a whole is structured around direct "ownership" of share or via a central well established custody system - it's functionally identical risk. You're counting on rule of law. And not just you - everyone. If it works it works, or it doesn't in which case the global financial system crashes and we've all got bigger problems. Also custody <> ownership.
Nor can any of this seize retirement savings:
>may seize securities used as collateral in lending arrangements with broker-dealers.
i.e. no different from bank seizing your house if your mortgage arrangement blows up.
There is nothing to see here
Which isn’t a great position to be in but, it’s worth making a few observations:
1) Even if your stocks went into the bankruptcy waterfall, you would have a very preferential place in that waterfall so you are highly likely to get paid in full. If you’re in the waterfall your claim is settled using all remaining assets of the bank, not just your savings. The people who made loans to them with your savings as collateral would be behind you in the waterfall most importantly, so they wouldn’t get dollar 1 until you were 100% paid in full.
2) To actually be worse off here (even notwithstanding #1) you’re really looking at some hypothetical financial meltdown where the banks go completely out of business and yet somehow your retirement savings are still worth something. It might not be a very reassuring thought but that’s not a very likely scenario is it?
3) When a broker dealer goes bust even if your assets are totally in segregated funds you don’t get paid back for frikkin’ ages. A person I know had Lehman as the prime broker for their hedge fund and they didn’t get access to their assets for I want to say a year or so.
It all comes down to: Margin.
If the market fails, they will give you a margin call. If you don’t have a margin account, your broker didn’t make one for you, then you’re safe.
According to this, this is total FUD. In case of a liquidation, security entitlement holder has priority over secured creditors, who have priority over unsecured creditors.
(* "Please use the original title, unless it is misleading or linkbait" - https://news.ycombinator.com/newsguidelines.html)