When a broker’s bankruptcy affects his clients: an example of a situation
When starting activities in the stock market through an intermediary, newcomers wonder how likely a broker’s bankruptcy is, and what risk it poses to an investor’s assets. In this case, there is nothing to worry about – all client funds and shares are kept in a separate account and are in no way connected with the broker’s personal assets. The latter has the right to conduct operations with the clients’ assets only with their consent. Therefore, in the case of the stockbroker’s insolvency, the beginner investor will not lose his investment.
However, this case has its own nuances, which should also be considered when operating through intermediaries. In March 2022 clients of one broker received a notice that he had problems with settlements caused by force majeure. The broker had a margin call, but could not close all of his obligations. Therefore, the clearing center took over the settlement of his positions, blocking operations for the broker. As a result in the process of the margin call they started selling securities that belonged to the clients, and the assets themselves were not marginal, and the owners did not give permission to sell them. The clients themselves had no debts and carried out operations only in a long position.The clearing center acted in accordance with the regulations. The point is that the broker kept clients’ securities on one account as a common pool. The center did not have access to information on client transactions – only the broker had that information. To avoid the situation of selling clients’ assets, the broker should have opened separate accounts for them, but he did not.
Despite the fact that such a case took place, it is an isolated one and at a little-known broker. Big companies make sure to avoid such problems and keep all assets in different accounts. Therefore, the risk of a newcomer getting into a similar situation is almost minimal, but on the condition that the client chooses the broker carefully. Besides, there are a number of recommendations that a client can follow in order to protect himself from losses.
First of all, choose a reliable broker with a large number of clients and many years of experience.
Experts recommend disabling the possibility of margin lending and overnight repo on your personal account.
If transactions are planned for large sums, it is better to use a segregated account. It costs more than a regular account, but it is safer. An alternative option would be an asset custody service provided by a registrar. However, this is relevant when stock transactions are rare.