As in they confirmed this to you specifically in a legally binding way upon request? Even if so, I don’t think it improves the overall loss risk for you in any meaningful way. If a SQ employee defrauded just you personally, obviously both SQ and if necessary PF would be liable to cover you anyway. If SQ as underlying broker would collapse entirely because of an internal fraud (think Wirecard where one third of the balance sheet was just made up) neither SQ nor PF will have the funds to compensate you, despite any assurances they may hand out now.
For a layman like me, what’s the problem with omnibus accounts? I mean the practical problem
For argument sake, if SWQ goes bankrupt, the total number of shares owned by their clients for any particular security like VT or GOOGL or whatever would still be there and can be handed over to another broker. Isn’t it?
I understand that they might not be segregating shares of each client in their individual accounts. But I am trying to understand what problem is it causing for our investments?
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An omnibus account is an account that combines the transactions and assets of multiple clients under a single name. Instead of each client having an individual account, everything is pooled together in this shared account.
The main risk with this type of account is that if there’s a problem with the entity managing the account (such as bankruptcy or a management error), it can be difficult for clients to recover their funds or prove what they actually owned. Since the assets are not clearly separated, it’s not always easy to determine who owns what portion of the investment.
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Sir, my 10 figures are within reach!*
My how-does-trading-work-under-the-hood elaboration wasn’t to promote app-only fintech (I would never use them), but merely to illustrate that if you, retail trader, trade through Swissquote, your orders will roughly travel through mostly entities outside of Swiss or Swissquote’s control, as they will when you trade through IBKR, UBS, ZKB, etc.
It meant to illustrate that the only difference is that your securities will end up in different custody accounts. Some of these custody accounts will be under Swiss jurisdiction, others not, even when you trade with Swissquote or other Swiss banks.
Even if your bank makes guarantees about making you whole if one of their non-Swiss sub-custodian has issues, I would make an educated guess that the sub-custodian’s national laws (or emergency laws made in a, ahem, emergency) take priority over your bank’s guarantees.
Anyway, the (Western) global financial system is a closely knit web, very interconnected and very inter-dependent with all parties involved, not just “yours”.
That’s why things also stand still in Switzerland when there’s a financial crisis (seemingly only) in the US like the GFC in 2008, or why the US Treasury Secretary will get involved with the Swiss government when “Swiss” bank Credit Suisse is about to go belly up.
If anything, I’d say the larger the amount of assets under management at a bank/custodian, the faster probably the processing (“Abwicklung”) in case things go south as the authorities will have a larger incentive to push things forward quickly if a lot of and large customers are affected versus some small fish getting fried at a smaller bank/custodian.
* In Rappen … 
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Custodian, not broker.*
Whelp.
– signed,
Don Goofy Quixote
* Don Goofy is quoting from his famous dictionary of trading entities, illustrated with windmills and Sanzo Panza:
Here is a practical example of why this can be a problem:
But since I assume that a list of who has how many shares is still available after a bankruptcy of a bank*, I personally do not rate this as a high risk. But that’s my own perception of risk.
*except for startups, but thats also my own perception of risk
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Fair point. So the conclusion on choosing a Swiss broker would be the one with a de facto global too big to fail guarantee: UBS. I’ll stay with SQ and the advice many others have given in case you really are worried about broker safety: Diversify your portfolio to multiple parties.
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I feel that I should clarify my statement:
By “trading”, I mean frequently (operating word) buying and selling, as opposed to a buy and hold approach where each is performed only once, with the occasional rebalancing.
The Swiss system is made to encourage the later (buying and holding), not the least through no taxation of capital gains. Under such a system, discrete fees applying when buying or selling have less relevance and over an investing career, a good swiss broker really won’t be that much more expensive than IBKR on a high level viewpoint (they will be more expensive but it’s outside the realm of provoking the necessity for adjustments to our expected level of quality of life by some margin).
When we start trading more, those discrete fees can start to pile up, though. Aditionally, traders (here again, meant as people who often buy and sell) are exposed to more and different risks than buy and hold investors. I’m assuming they have more risk tolerance and that, among the risks to which they are exposed, the security of their broker is less prevalent (because diluted among other risks) and needs to be balanced with the risk of severe underperformance due to the friction of discrete fees.
My point is mainly that (good) Swiss brokers are plenty good for buying and holding and that their fees should really be put in perspective over the longer term of the actual investment horizon. I wouldn’t use them for trading, though, as that would be pretty inefficient. The solutions are either don’t trade and only buy and hold, or use a foreign, low fees broker that you trust for your trading activities.
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Here’s an exclusive excerpt from The Secret Journals of a Hypocrite by … someone:
Despite arguing for IBKR, I’m in practice actually doing the same because I’m decumulating:
Most of my assets are at SQ, but I exclusively use them for receiving dividends (and moving them to my retail bank that pays bills), i.e. not for trading. Custody fees are negotiated fixed at the minimal fees.
My most recently (last couple of years) traded assets (about 10% of the total) are at IBKR. With the money held and cash flow generated there (dividends and coupons) I plan to re-invest, benefitting from the awesome fees.
If IBKR goes belly up, I’ll have the cash flow I need to live off and will be waiting for IBKR to be processed. Damage is not being able to re-invest the cash generated there (and losing some due to inflation).
If SQ goes belly up and the Abwicklung takes longer than my emergency fund, I won’t have access to the steady cash flow and will have to grudgingly start selling at IBKR to cover the gap.
Note, though: If I were still in my accumulating phase, all the necessary cash flow would be coming from my human capital and I’d take the risk of being just with IBKR. If they went belly up, my cash flow needs would be covered by my work and if it takes, say, even a year or so till IBKR is processed, the only damage I have is that a year’s worth of cash flow generated there wasn’t invested but sitting there in cash, shrinking a bit due to inflation.
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The irony is that by paying more to a Swiss broker, we want to have a better service, i.e. custody in own name, than with much cheaper foreign brokers. Now, with these changes (?) we can pay more, but get the same as from IBKR or Trade Republic.
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Confirmed to me specifically. I did not ask the customer representative to state explicitly that this was legally binding, but my question and its answer seem to be part of their playbook. It also matches my recollection of reading their T&C.
One difference is that a contract with SQ (or with SaxoBank or IBKR) allows them to allocate risk to undisclosed third parties and to get compensated for that. A contract with PF does not.
Examples:
- A relationship with SwissQuote/Saxo/… allows them to deposit 10% of my precious Mobimo stocks to the Madoff Bank Dubai LLC. If Madoff Bank Dubai LLC commits fraud, I bear that risk as per SQ T&C: I can lose 10% of my stocks without SQ defaulting. If I want SQ/IBKR/… to commit not to do things like that, they charge extra.
- My relationship with PF, on the other hand, requires PF to either default or to make me whole. PF currently (2024-12) has an AA S&P rating and is considered a systemically important bank in Switzerland.
- As another example (the one I was initially commenting on), VIAC commits to keeping assets with Regiobank Solothurn and Bank WIR additionally commits to either default or make me whole.
Another difference with eg: IBKR is that with PF my name is registered in the shareholder registry of the companies (eg: Mobimo).
Presumably, that makes it somewhat harder for PF to just invent balance sheet (à la Wirecard) as they would also have to convince a third party. I presume it also ensures that there is a current external record of my ownership which may help in a Synapse situation.
My uderstanding is SQ is similar to PF in this case.
FYI, IBKR’s customer support declined to tell me which bank is their depository for my assets.
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I can’t tell you, either, but found this on their website:
IBKR is currently integrated with the following Custody Banks:
-
Bank of New York
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Brown Brothers Harriman
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Fifth Third Bank
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Huntington Bank
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Northern Trust
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J.P. Morgan
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State Street Bank
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UMB Bank
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US Bank
Source:
The information on the page you quote only apply to people who pay extra to control their Custody. It is what I meant by “If I want SQ/IBKR/… to commit not to do things like that, they charge extra”.
IBKR provides this only on request, and not to regular investors. For folks like us, they say the following:
A portion is deposited primarily with large U.S. banks in special reserve accounts for the exclusive benefit of IBKR’s clients. These deposits are distributed across a number of banks with investment-grade ratings so that we can avoid a concentration risk with any single institution […]
Which to me reads as soothing fluff with tricky wording such that it represents no meaningful commitment. (I might be jaded, but “the following banks held deposits” reeks)
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Are you sure? The way I read this after googletranslate is that clauses 7(a) and 7(b) suggest that PF can hold securities in an omnibus either in CH or not (“Custody assets may be held collectively (or handed over to third parties for safekeeping) or stored with a central depository.”), and can also hold “in its name or third parties” if “registering the custody assets in the customer’s name is uncommon or involves unreasonable effort” “at the customer’s risk and expense.”.
This text is unclear to me, supposing that not registering in my name is uncommon or involves unreasonable effort should imply that they are registered in my name, but doesn’t define what’s uncommon or involves unreasonable effort. It also suggests that option being bad or suboptimal, given the “customer’s risk and expense” bit, so hopefully they’d not chose it…?
I also don’t read this text as commitment to cover loss, unless it’s possible to prove that PF/SQ did bad business, basically.
I mean, they better do. That is…if you (or a collective of effed investors) can prove it in court (here I’m betting on public outrage and political intervention in case of systemic bank, but haven’t followed the CS story much, edit: would the Swiss public give two shits for FIRE people using an American broker to pay less fees and avoid the Swiss stamp duty? I highly doubt it, the sentiment could be “we have the best banks on the planet, you fucked up, boo fucking hoo”, but as always could be wrong), and,
That’s a possibility too. So we’re hanging our hats/coats/balls on good practices, basically, and how much they are insured for, if securities are at all insurable, and whether the insurance and reinsurance can/will cover. It’s a risk, probably a small one but not zero. Best worst case scenario one doesn’t see their money back for years…
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Yes I didn’t like this “loophole” either. So I asked customer support to register the assets in my own name. They confirmed to me that they did and that they will do it going forward.
I am unsure if it was the case before my request. All said assets are Swiss stocks or funds, unclear to me if it made a difference.
Furthermore this being a Swiss bank, the " Federal Act on Intermediated Securities" (FISA) applies. It states, among other things:
A custodian shall be liable, as if they were its own, for the acts of a sub-custodian which: […] independently and over a long period of time administers and settles all securities transactions on behalf of the custodian. […] Agreements to the contrary shall be valid […] when made in favour of investors.
My reading is that this specifically matches the relationship between PF and SQ.
Whether my reading is correct or not, PF support agent confirmed that PF would cover in case of eg: fraud by SQ.
I remember reading a similar assurance in written form in one Postfinance’s published PDFs, but I am not finding it back.
Actually no. Either there is mismanagement/fraud by a sub-custodian and PF has to make me whole, or there isn’t and PF still has to. I don’t have to prove that the sub-custodian comited fraud.
Indeed there is.
We can cover it (PF does and has an AA rating + other safety attributes), describe it (SQ does) or observe that our broker deliberately obfuscates it (IBKR).
This of course has cost. I would be interested to know how much SQ charges for better custody.
For PF the cost 72F/year + a possibly few hundreds whenever I sell (buying was done in IBKR, if I were to sell I would transfer the security back to a cheap non-Swiss broker for 108F/line, unless PF has reduced its fees by then).
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I’m the same, the CHF18/quarter as trading fee credits mean the account costs me a mere CHF8/year with the sums I am buying 4 times per year. I mean come on, a sandwich, an apple and a coke in a gas station costs as much…
I am sure there are esteemed (not being sarcastic) colleagues here who disagree, and will say, perhaps correctly, that this cost is an illusion of safety and Swissness and they really are identical to any other broker but just more expensive because reasons, but I chose to live under the illusion 
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What I don’t understand about omnibus vs. segregated account and security is the following.
Let’s assume physical gold in a bank:
- Omnibus account would mean that all gold of all customers is stored in a single deposit box, one big pile of gold. The separation takes place digitally in a database.
- Segregated accounts would mean that each customer has their own deposit box. The gold would be physically separated. The deposit boxes would be labelled with numbers and a database would show which deposits box number belongs to which customer.
The problem is now:
If the database of who owns how much gold is gone (omnibus account), it is no longer possible to trace how the gold has to be distributed in the event of bankruptcy. But this is also the case with segregation: if the database in which it is recorded which deposit box belongs to whom is lost, it is no longer possible to trace who owns which box and therefore how many gold.
Gold is not comparable with shares, of course. But still.
From a purely technical point of view, I don’t quite understand why one should have an advantage over the other. Both are database records in a digital database on a server/backup (now called “cloud”). The question is therefore more: Do segregated accounts have more requirements from a regulatory point of view and are they therefore more secure?
If not, paying attention to this is completely unnecessary…
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Continuing your analogy, all boxes would be actually located in the vaults of SNB. In one case, SNB knows that a content of one box belongs to the customers of the bank (not to bank itself). In the second case, SNB knows each individual owner of the box.
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But is this the case for shares? The SNB probably doesn’t know anything about it, but does the stock exchange? Does the exchange know my real name? Or who would be the analogue to the SNB here?
In the US, the stock certificates are held by Cede and Company - Wikipedia in practice, and the Depository Trust Company - Wikipedia handles the transfers between brokers/participants.
I assume in Switzerland SIX has a similar setup.
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