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How safe are my stocks, funds and ETFs in my portfolio?

Basically, stocks, funds and ETFs are safe in the custody account. However, in troubled times, many people worry about their savings and investments. Bank failures in previous years do not help calm the situation. We explain why securities are safe in a custody account.

The essentials in brief:

  • Securities in the custody account are considered special assets and are therefore not covered by deposit protection.
  • Usually, securities are held at the banks as part of collective custody.
  • Individual safekeeping is not possible with all providers, and if so, only on request.
  • Brokers and investment companies may lend securities from the investment fund to third parties.

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Table of Contents

Securities are special funds, not deposits

The difference between a call money account and a share is that a security in the custody account is what is known as a special fund. Deposits, that count

  • Balances on current accounts
  • Overnight money accounts
  • Fixed deposit accounts
  • Savings accounts

are protected by the statutory deposit insurance. This amounts to 100,000 euros per customer. If the institute is part of a joint liability, for example the deposit protection fund of the German banks, the liability increases to up to 20 percent of the bank's equity per customer.

The difference between deposits and custody accounts is that deposits are in fact a loan to the bank. She can work with the money. The custody account has no other task than to hold the securities in safekeeping.

This does not apply to securities due to the status of the investment fund. Banks only keep stocks, ETFs, bonds and fund units in custody. If the bank should go bankrupt, these papers can easily be handed over to another bank for safekeeping. The insolvent bank and the insolvency administrator have no access to it.

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However, there is one exception when it comes to security. In the case of bonds from the bank that is in trouble, the custodian belongs to the group of creditors and must wait to what extent the bond will be repaid. If shares of the bank concerned are in the custody account, it affects the investor as the owner of the bank. A share represents a co-ownership share.

How safe are fund shares?

Funds are issued by fund companies. The investor can either leave them in safekeeping at a bank or in the custody account with the fund company. All securities held by a fund company, be they papers from fund units that are not in circulation, or fund units that are held in custody for customers, are also considered special assets.

The investment fund must be kept separate from the assets of the fund company. In the event of the company's insolvency, the papers in the fund can also be transferred to any bank for further custody.

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Individual custody or collective custody?

Securities only rarely consist of physical pieces. In the case of funds, this would not be possible without further ado, since fund units are calculated to four decimal places.

Usually, securities are only accounting quantities. At times when shares were still physically available, bank customers could fall back on the wrapper single custody. The papers were stored in the bank's vault and wrapped in a wrapper with the customer's name on it. The individual safekeeping goes hand in hand with the obligation of the custodian to clearly distinguish the individual customer portfolio from the remaining inventory.

Standard today is the collective safe custody, the bundled grouping of the "papers" of a class, i.e. the booking items. Proof of ownership based on the proportionate volume of collective custody results from the deposit statement. Collective safe custody is by nature the more cost-effective solution.

How can I opt for individual custody?

When opening a securities account, brokers generally assume that the securities will be placed in collective custody. The only exception is when actual items are delivered that are damaged. In this case, individual wrapping is provided.

Anyone who generally opts for individual custody initially has bad cards. Using the normal search function with the entry “individual custody” or “collective custody”, there is no information from the brokers. Anyone who tries to use the list of prices for services will at least find what they are looking for at Commerzbank, which makes the following statement in a subordinate clause: "(e.g. fee-based services in connection with effective securities certificates or the brokering of entrepreneurial investments)".

Investors who would like to indulge in the luxury of knowing that their securities are kept separate from other customers should inquire with the respective bank or broker about the circumstances under which this is possible.

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Can the broker lend my shares?

Anyone who has heard the term "short selling" may be wondering how an investor wants to sell stocks that he does not own. The process is quite simple. He borrows shares from a broker, which the broker has in custody for customers. The basis is a forward deal that requires delivery at a certain point in time. Hope is aimed at falling prices. The borrower delivers at the agreed higher rate, buys the paper back more cheaply on the market, hands it over to the lender and earns on the difference.

Practically all brokers and investment companies have in their general terms and conditions (GTC) that they are entitled to lend the shares held for safekeeping from the fund. The account holder cannot contradict this.

The point of stock lending for the broker is that the borrower has to pay a fee for it. For shareholders of mutual funds, this means that the fee flows back into the fund's assets and thus represents an additional source of profit. As a rule, two thirds of the loan fee goes to the investors.

Brokers pass some of the stocklending income on to their clients in the form of lower fees. They also benefit when third parties speculate with “their” shares.

Is Stock Lending Risk Free?

Anyone who has stocks in their custody account and has to expect that the broker will lend them out for a forward transaction will be happy to know whether this is risk-free for them. Well, the risk lies in the fact that the borrower will become insolvent in the time between the removal of the papers from the depot and the maturity of his contract. In this case it can be critical to get access to the papers.

However, the brokers protect their customers by depositing security in a separate account. This is usually more than 100 percent of the market value on the day of the loan.

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Uwe Rabolt