online brokers - banks versus non bank
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Thread: online brokers - banks versus non bank

  1. #1
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    online brokers - banks versus non bank

    hello all,

    I currently have an online broker account with td waterhouse and wanted to know if anyone has the answer to my question.

    since the CDIC act changed and now allows bail ins by the banks, I was curious as to how this may effect my td waterhouse holding. since td manages the brokerage in some way and my holdings are stocks could td liquidate my stock as part of a bail in?

    if this is the case would it be a safer bet to use a non bank online broker to protect your holdings from a bail in?

    your answers would be most appreciated.

    thanks


  2. #2
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    CDIC insurance is for bank deposits. CDIC does not insure investment like stocks, bonds, ETFs -- they never have. The only insurance that's relevant for brokerages is CIPF. This insurance covers you if the brokerage collapses. This is not government insurance and has nothing to do with federal guarantees. You can trust this insurance as much as you trust the CIPF.

    There's nothing safer about using a non-bank brokerage. Generally all brokerages are protected by CIPF (you should confirm that yours is). Most of us, including myself, believe that the big bank brokerages are the safer ones because they are under the umbrella of a giant bank.

    To make your brokerage experience even safer against losses, I suggest:

    1) Don't leave cash amounts sitting in your brokerage. While CIPF does insure these, cash amounts are used by the broker for any business activity they want. They do not hold the cash separately for you. Leave cash in regular depository bank accounts, which are eligible for CDIC insurance.

    2) Using a non-margin, cash only account is generally safer and gives the brokerage less freedom to lend your shares out. When you use margin and borrow any amount of a position, the broker then has the right to do various things with your shares.

    Additionally I think you have something backwards here. Bank accounts with CDIC insurance are safer than securities account, even with CIPF insurance. This is because CDIC is a federally backed guarantee. CIPF is a private fund, not government. The government will make whole any CDIC insured bank deposits. There has never been any suggestion that deposit insurance will be violated.

    The government has been very clear in its message: make sure your bank deposits are eligible for CDIC insurance, because uninsured amounts are subject to loss.

    The "bail in stuff" is about uninsured deposits -- such as foreign currency/USD deposits, or amounts above the CDIC maximums. Those amounts are at risk of loss, which shouldn't be a surprise: they are not insured!
    Last edited by james4beach; 2017-01-02 at 11:46 PM.

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    I think the OP is mistaken. Legislative changes on on 'bail in' provisions makes debtholders (bond holders) and shareholders (preferred shares) firstly responsible for re-capitalization of a potentially failing bank before government has to step in and/or before uninsured deposit holders are at risk. It actually makes deposit holders more safe than they were previously. The changes in the CDIC Act simply now permits CDIC to be appointed as receiver. https://www.osler.com/en/resources/r...bail-in-regime

    There is no net change in risk (indeed a potential lowering of risk) for CDIC insured deposits in banks and CIPF protected brokerage assets in brokerage accounts. IMNSHO, the OP is more safe in a big bank brokerage than the independents. They are better capitalized and can draw on the weight of the mega bank to support their business model.

  4. #4
    Senior Member NorthernRaven's Avatar
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    Quote Originally Posted by james4beach View Post
    The government has been very clear in its message: make sure your bank deposits are eligible for CDIC insurance, because uninsured amounts are subject to loss.

    The "bail in stuff" is about uninsured deposits -- such as foreign currency/USD deposits, or amounts above the CDIC maximums. Those amounts are at risk of loss, which shouldn't be a surprise: they are not insured!
    No. I don't believe there is any provision mooted which would bail-in customer deposits, insured or not. My memory is that bail-ins would be on certain types of debt (convertible bonds, and perhaps othersenior debt). Bail-in legislation would only apply to the largest banks, which would probably not be allowed to fail even after bail-in, and uninsured deposits wouldn't come into play. For smaller banks, uninsured deposit risk would be unchanged - no bail-in risk, just whatever risk of insolvency is there.

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    Thanks NorthernRaven.

    Let's not forget that the first step towards raising bank capital is to raise more equity. Losses for equity holders come long before they touch anything else - bonds or otherwise.

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    Quote Originally Posted by james4beach View Post
    Thanks NorthernRaven.

    Let's not forget that the first step towards raising bank capital is to raise more equity. Losses for equity holders come long before they touch anything else - bonds or otherwise.
    But don't forget the new rules require senior debtholders and pref share holders to convert to equity under certain conditions that the OSFI dictates. That is how a 'forced' equity injection (other than a market secondary offering) can be made before the taxpayer is tapped. The new rules are good for the taxpayer, less so for bond and pref share holders. I won't own the NVCC compliant pref shares as a result of the change.

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    Quote Originally Posted by james4beach View Post
    CDIC insurance is for bank deposits. CDIC does not insure investment like stocks, bonds, ETFs -- they never have. The only insurance that's relevant for brokerages is CIPF. This insurance covers you if the brokerage collapses. This is not government insurance and has nothing to do with federal guarantees. You can trust this insurance as much as you trust the CIPF.
    I understood that anything that is not in a bank account(tfsa, cheq, gic and savings) up to 100k is covered by CDIC. I also understood that stocks, mutuals funds etc are not covered by CDIC. so essentially anything not covered by CDIC is up for grabs by the bank and can be liquidated to bail them out. please clarify if I have misunderstood.

    my concern is that any holdings in TD waterhouse since it is part of the bank can also be liquidated as part off a bail in. since non bank online brokers are not a bank they would not need to be bailed in and the CIPF insurance covers a brokerage collapse.

    Im just trying to cover my ass as best as I can. the idea of having all my holding liquidated by TD waterhouse for a bail in worries me and perhaps a non bank broker could alleviate that worry.

    Im a worse case scenario kind of guy. I like back up plans.

  8. #8
    Senior Member Beaver101's Avatar
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    ^ What non-bank online broker do you have in mind that can offer better protection for your investments -just curious.
    Everyone should be respected as an individual, but no one idolized.-A. Einstein

  9. #9
    Senior Member humble_pie's Avatar
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    we should keep in mind that a situation that would force a chartered canadian bank to convert its CoCo bonds & preferred shares to common shares would be an armageddon kind of universal collapse.

    in such a scenario, other banks would also be going down or hovering on precipices. Other banks in other countries as well.

    me i'd assume that the small private brokers - in all probability less well capitalized than their big bank cousins - would be already badly hit or even wiped out by such armageddon.

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