Safe custody of securities [2025]

Investing / Brokers
41

I can assure you that these retail customer gold bars are all stored in a single deposit. I’ve toured those facilities.
I don’t know how they deal with the safekeeping of “the database” but I would bet they have something offline every day for orders made and trades settled. You know, like in the old days before digital: a book ledger.

If you want a segregated “account”, you need to take possession of the physical and store it yourself. There are options beyond your bank’s standard safe deposit box (which are pretty safe but still occasionally do get robbed).

The safest safe you can rent that I have seen so far sits in a room in a former Swiss army bunker under a mountain. Ultra high net worth folks rent segregated safe deposit space there. Conveniently, there’s a little airport just nearby if you want to transport your gold bullions in your own private jet or so.

It’s the kind of place where national banks – including the SNB – store their physical gold. Of course not all of it – they are even more paranoid than the people here wanting to avoid IBKR or insisting on having a dozen brokers custodians for their securities … ;-). The place is just one gold custody location for them. They – the national banks – get their own “account” which is a separate cage from the other cages owned by other national banks under the same mountain.

When one national banks sells gold to another, the people who run the place use a little cart to transport the bullions from one cage to the next, which might possibly be in the same or in a different room. Kind of surreal to watch when you see the logistics operator and their supervisor push as much gold as the cart is specified to carry – surprisingly small dimensions given gold’s specific weight – through the rather small hallways (carved out many many decades ago) deep under that mountain.

The entire scene lends to thinking about heist movie plots … but then again, the way the entrance is set up, you can essentially protect the place with one man and a gun even if the bad guys rock up as a commando with explosives and what not. The guy with the gun can then retreat and activate protections that … well, you won’t get through with a tank or so. In the mean time, the guy with the gun notifies the nearby police, and in the attack scenario with tanks, the Swiss army conveniently has a headquarter on alert real close.

If I ever stop posting here, I will have found a way through the many layers of protection and you’ll never hear from me again. After I die, the film rights of my memoires will be bought by Hollywood and “Ocean’s 42” will be released shortly after, still starring George Clooney and the gang, but it’s all AI generated.

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42

… and I have my wealth on couple of 50g devices and a piece of paper. I’ll buy some new Goldvreneli just for fun.

43

I found two pointers. First, in the FISA law, look for article 19, second paragraph:

https://www.fedlex.admin.ch/eli/cc/2009/450/en#art_19

Second, from SIX:

In the case of an ISA, although arguments could be made that the relevant client should not be exposed to a shortfall that is clearly attributable to an account held for another client or clients, it cannot be excluded that a shortfall on any other (ISA or OSA) account would be shared rateably among clients, including clients who do not have an interest in the relevant account. Accordingly, a client holding whose securities are held in an ISA may still be exposed to a shortfall on an account held for another client or clients.

Again I’m not a lawyer, but my humble understanding as a retail investor is that having an individual segregated account wouldn’t seem to offer full protection in case of a shortfall.

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44

How do you organize such tour? It’s fascinating.

45

You … get invited.

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46

You can also find the English version of the TCs here: https://www.postfinance.ch/content/dam/pfch/doc/0_399/01613_en.pdf

TBH, I found Postfinance T&C in how they adress safekeeping the most unconvincing one out of the ones I’ve looked. In the meantime, I’ve checked other banks (EKI Interlaken, Berner Kantonalbank) and those two also offer omnibus accounts. This seems to indicate to me that this is more widespread than I initially presumed…

Back to Postfinance’s TCs: The reason I concluded that they offer account seggregation is par. 7b.

[quote]If registration to the Customer is unusual or involves an unreasonable expense, PostFinance may register the custody account assets to itself or to a third party at the cost and risk of the Customer. Drawable securities may also be held in collective custody.[\quote]

The paragraph is formulated as an exception to the rule and seems to indicate that omnibus accounts are only allowed when this is unusual or involves an unreasonable expense. E contrario, the standard is account seggregation and only in exceptional circumstances is PostFinance allowed to deviate. Both terms (unusual or involves an unreasonable expense) are undefined terms and would be subject to legal interpretation ((egbin a Swiss court). Again, this is just my interpretation (disclaimer) and to get (absolute) clarity, you’d have to ask PostFinance directly.

47

I agree with everything you wrote, that’s my own interpretation too.

PF allows the easy registering of Swiss securities, as far as I remember, but not foreign ones.

Edit: first 2025 post, happy new year to you all and your families!

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48

Don’t you need an account as well, which costs 5.–/month, so it’s 132.–/year?

49

I think the basic package becomes free if you have over 25k CHF invested? I certainly don’t remember ever seeing any fee, and have the account for a year minus a few days now.

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50

Ah yes, you’re right. It was buried in a subsection.

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51

Great reading! Thanks for sharing.

True. No solution provides complete protection. Nevertheless, risks vary in magnitude.

In online communities like ours, it’s common to see people fine-tune their banking packages and subscriptions down to the last cent. However, I seldom see folks outline the risks they are taking in exchange for lower fees.

To me, this is puzzling because I believe most people understand that comparing investments solely based on expected returns is insufficient.

The differences between brokers is more than “segregated accounts” VS “omnibus accounts”.
I think relevant questions include: Can a reputable third party verify the ownership claims made by the broker? Which counterparty risk is the broker exposing itself to? Does the broker (or another entity) guarantee coverage in case of a shortfall? What are the exclusion of that coverage?

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52

The FIRE community is first and foremost about minimizing costs, as this is within everyone’s control. Their aversion to spending money means they prioritize that over anything else.

Budgeting is essential, budgeting down to rappen/cents essentially warrants clinical investigation as much as uncontrollable spending does. Both are an addiction and like all addictions they usually lead to something miserable (being destitute vs being the richest corpse in the cemetery, having lived a non-life).

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53

Thank you for pushing the issue of broker counterparty risk. I am worrying about it myself too, having most of my investments at Interactive Brokers.

I tried to find brokers that seem less risky, but so far could not find any satisfactory ones. Swissquote (Postfinance, Yuh) and Degiro seem to suffer from the same issues as IBKR (keeping securities in 3rd party accounts, possibly in different countries, possibly in omnibus accounts). And they all point out (more or less obviously) that the investor carries this risk.

Could you find any broker / robo advisor that seems less risky in this regard? (VIAC, TW?) What do you use?

54

The key question is what the counterparty risk actually is.

If you own ETF and ETF own shares of company and IBKR / other brokers just hold them using custodian banks, unless these brokers are stupid or corrupt, there should be negligible chance of your investment being at risk even if brokers goes bankrupt

55

Well, what happens when the custodian bank goes bankrupt? Possibly, even the custodian bank and the broker might go bankrupt at the same time during a crisis.

The broker does not need to be stupid or corrupt, they just need to care about their costs more than about your access to your securities / money during or after an unexpected event.

Having my securities at a US broker who stores them in custodian banks somewhere (?), who in turn might put them in omnibus accounts sounds like too many leaps of faith (and different jurisdictions involved) for my taste. And not exactly what I would call antifragile.

56

As I understand it, if a custodian bank or a broker fails, your securities would be transferred to another bank/broker relatively quickly. See the FlowBank case for a recent example of this. If one of IB’s custodians fails, I assume IB would handle everything and simply notify you that you may not be able to access your shares for some time. If both go bankrupt at the same time, it probably doesn’t change much other than maybe being slower.

I think this is probably pretty low risk, at least in properly regulated and regularly audited entities like IBKR and the banks they work with. If you really want to eliminate that risk, I think you’re probably going to have to go for gold in a safe deposit box.

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57

I see
I feel this would need a lot of wrong things to happen at same time to become a problem. But yeah it could be a problem if everything goes wrong

58

Now I feel like this too, but probably wouldn’t have in 2008 or in March 2020 :wink:

59

I find it helps a lot if you don’t follow the news. :rofl: That, and having a good chunk of your yearly expenses in cash.

60

The details are complicated, but if I had to jot down an approximation, I would say:

  • Safe (AA)
    • PostFinance: It has an AA rating (like Ireland or Belgium), guarantees losses by custodians, large enough that it would be an Affair if it failed, register securities in client’s name.
    • SwissQuote IF you pay extra for individual customer account segregation: They also have an AA rating, and I presume they guarantee losses by custodians with this arrangement (terms are not available online). I would rank them a notch lower than PostFinance because I think it would be less of a scandal if they went belly up.
  • Probably OK (“safe assuming no well-regulated bank defaults”)
    • VIAC: Assets are held at a regulated Swiss bank (Solothurn Regiobank) and the Bank WIR additionally provides a guarantees. I’m not so confident about WIR though, and Solothurn Regiobank is small also. Still: no leverage and bank guarantees, I guess it should be OK.
  • You do you
    • SwissQuote IF you do not pay extra for individual customer account segregation: With the default arrangement they explicit put the risk of their custodian onto the client, and given they pick custodians…
    • IBKR: BBB+ rating (like Botswana) for the parent company, complex structure and refused to answer my questions about custody.

(EDIT: Fixed mistake on IBKR rating. Also I just want to restate that this is really just my own qualitative assessment, I didn’t base myself on an established framework and I didn’t develop a rigorous methodology.)

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