# Security of portfolio in an online brokerage



## clovis8 (Dec 7, 2010)

A friend was asking me about the security of his portfolio in a Questrade account. He has all his money in equities. I told him that he owns the stock now and Questrade doesnt really have his money anymore. If they went under it would not effect him. 

Am I correct?


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## plen (Nov 18, 2010)

They're a member of the CIPF.

$1,000,000 is insured by default, up to $9,000,000 can be requested.


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## clovis8 (Dec 7, 2010)

Thanks Plen;

But I am still a little confused. Once I buy an equity it basically not longer has anything to do with Questrade I thought. I now own that piece of the company. I can see needing insurance for my cash balance but why for equities? It's not like QT is buying the stock on my behalf and holding it. I own it personally. 

Perhaps I am thinking about this incorrectly but lets say I had stock certificates in a safety deposit box. I would not care if the bank went under as the stock has nothing to do with the solvency of the bank.


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## furgy (Apr 20, 2009)

It's like money in a bank account , if the bank goes broke , they don't have it to give back to you , that's when the insurance comes in.

The same can happen with brokerages , sure it's your stock , but they have possession and use of it , such as lending to shorters etc.

Things could go wrong , and insurance is needed.


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## humble_pie (Jun 7, 2009)

this is actually a vast & complex topic. Most people never think beyond the mantra that each account is insured for $1 million. A few are concerned enough to consider obtaining the actual stock certificates & storing them in a safe place. Of that few, probably only a tiny proportion actually do this.

the problem is that the CIPF was created, and is maintained, in order to bail out the odd firm here & there that gets itself into trouble.

not long ago, in 2008/09, the global financial system faced total collapse, and probably would have collapsed had not the US and other nations sharply increased their money supply (thus fuelling other problems.) As a result of the collapse of a number of major US financial institutions, the US FDIC (equivalent of our CDIC) ran out of money & remains bankrupt today, operating on extra assessments on surviving banks & extra federal cash injections. In 2008/09, there was the possibility that true global collapse would have bankrupted our CDIC as well.

the CIPF is a pint-sized miniature version of the CDIC for brokerage houses. All it can accomplish, with the monies it has on hand or can raise from the industry, is the bailing-out of the odd brokerage here & there that gets into trouble. It should be noted that, over the years, the CIPF has always done this, and efficiently too, whenever the need arose. There have only been a few cases. However, in our lifetimes we've never suffered a total 30s-type depression or worse. In such a vast financial breakdown, the CIPF would vanish immediately. Its small funds would get sucked up so fast that they would be meaningless.

this is the main reason why i don't have accounts at small privately-owned online brokers. There are a couple other reasons, but this is the main one. Because they are privately-owned, we don't know to what extent they are capitalized. We don't know what their banking & financial resources really are. All we know is that they meet minimal exchange capitalization requirements.

one should also consider the question of what would happen, in practical terms, if one's own individual brokerage should fail. All securities in all accounts would be frozen. The freeze could last months. I'm not an authority on the history of such failures, but the impression i have is that brokerage failures in canada have been remedied more quickly than those in the US, where brokerage failures have been known to freeze accounts for up to a year.

no one would choose to go through grief like that. Since keeping printed stock certificates in a vault somewhere is not an efficient option (in a total global collapse many companies would go bankrupt & their stock certificates would be worthless), i for one think that investors should have minimal faith in the brokerage industry & in the CDS system. It's wise imho to consider the liquidity & capitalization of the brokerage to which one's life savings are entrusted. And it's wise imho to have a plan for downside protection if a global financial nightmare should occur, or even if the present nightmare should worsen.

but i also know that such concerns & precautions are both rare & unpopular among investors, so i doubt that anyone will even have read this far on a topic they'd rather not think about. It's so much easier to just keep repeating about the $1 million in CIPF protection.


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## the-royal-mail (Dec 11, 2009)

What a great thread. Thanks for all who posted and especially humble on the last post.


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## warp (Sep 4, 2010)

As far as I have been able to find out....Yes there is $ 1 Million in insurance for members.

If a brokerage goes into bankruptcy, all your equities,( common shares etc), would be transferred to another brokerage.......so you would still own the shares outright. I assume your dividends would continue to be paid.
How long this might take, I do not know, but I was told it would be done as quickly as possible.

Any cash etc, that you might of had would be frozen until the insurance paid you back.

I dont know how long this would take either, but that woyuld prob take longer, and you probably wouldnt get any interest on it either.

Like HUMBLE, I prefer to leave my assets in a big bank brokerage.
For me its worth it to pay the extra few dollars in trading fees, ( and as I am mostly a buy and hold dividend guy, these dont add up to a lot anyway)

If I was a trader, making alot of trades the lower costs might be worth it.

I like to sleep at night,,,its enough to worry about my holdings, let alone the institution "holding" my holdings.

As well, I get very good service where I am, ( as I am a good customer)...and i like that too.


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## humble_pie (Jun 7, 2009)

of course it's a million. These are still normal times. Times were close to the brink in 08/09. On the edge, indeed the precipice, of normal. Top bankers & govt were not talking about it. I heard that parliament had authorized emergency injection of several billion to the CDIC if necessary (it wasn't).

in normal times the CIPF has enough money to bail out the odd brokerage here & there that goes under. It can also levy extra assessments on all the other brokerages to help if one fails (this has happened in canada) (the brokerages were not happy about it.)

but CIPF does not have & could never obtain enough money for a nuclear financial winter. In a global meltdown i'd expect them to promptly cloister the fund in canada. It's possible that big bank-owned brokerages could perish also, it depends on their corporate relationship to their parent bank & i'm not sure that even Racer herself could analyze that.

these are still normal times. All i wish to do is open a crack in the widespread assumpton that CIPF has enough money to bail all brokerage accounts in a worst case multi-failure-and-global-collapse scenario.


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## plen (Nov 18, 2010)

humble_pie said:


> All i wish to do is open a crack in the widespread assumpton that CIPF has enough money to bail all brokerage accounts in a worst case multi-failure-and-global-collapse scenario.


But in such a case, how reliable will the CDIC be?


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## furgy (Apr 20, 2009)

warp said:


> As far as I have been able to find out....Yes there is $ 1 Million in insurance for members.
> 
> If a brokerage goes into bankruptcy, all your equities,( common shares etc), would be transferred to another brokerage.......so you would still own the shares outright.


That's a pretty simplistic assumption , Kinda like saying when a bank goes bankrupt , your money will be transferred to another bank , and you still own it.

When a bank goes broke , you're money is already gone , someone else obviously has it now , only the insurance can save you at this point , providing there is enough to go around.

If a brokerage goes broke , chances are , your shares and cash are long gone and belong to someone else now , stocks are tradeable securities just like money and can be bought , sold , traded and lost , just like money.


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## Square Root (Jan 30, 2010)

I think you all are overreacting As long as you have not margined the shares they should be there for you. Regs require the shares be held separately if not margined. If you do not think this works why would you have shates at all ? On he other hand I use TD Waterhouse so not worried. If you are suggest you use a bank owned brokerage. Might cost you a couple of bucks more per trade.


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## clovis8 (Dec 7, 2010)

I admit I am new to all this but some of the responses here just dont sound right to me. 

Let's say I had a storage locker and the storage company went insolvent. They dont own my belongings. I assume this is how the brokerage works also. They are simply storing my personal property. 

It's not like a bank who takes your money and uses it thereby giving me interest for that privilege. I understand that the brokerage can lend out your stock for other to short and perhaps that stock would be lost if they brokerage went insolvent but surely the rest is your personal property just like the stuff in the storage locker.

no?


P.S. That leads me to another question. The bank has to pay me to use my money why does the brokerage not have to pay me to allow others to use my stock for shorting?


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## Eclectic12 (Oct 20, 2010)

clovis8 said:


> Thanks Plen;
> 
> But I am still a little confused. Once I buy an equity it basically not longer has anything to do with Questrade I thought. I now own that piece of the company. I can see needing insurance for my cash balance but why for equities? It's not like QT is buying the stock on my behalf and holding it. I own it personally.
> 
> Perhaps I am thinking about this incorrectly but lets say I had stock certificates in a safety deposit box. I would not care if the bank went under as the stock has nothing to do with the solvency of the bank.


Actually, QT is buying the stock on your behalf, registering in their name with the stock company and then using their computers to report what you own and forward dividends, warrants, rights etc. When there is a vote, they will also notify you of the details and ask for your vote, in advance of the meeting.

Using the safety depsoit box idea, it is QT's safety deposit box and the shares are in QT's name. When you want details, the person in charge of QT's safety deposit box would lookup what part of the contents is yours.

If QT goes under, then the parts you own have to be confirmed, assuming QT has not done something with them.


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## Eclectic12 (Oct 20, 2010)

warp said:


> As far as I have been able to find out....Yes there is $ 1 Million in insurance for members.
> 
> If a brokerage goes into bankruptcy, all your equities,( common shares etc), would be transferred to another brokerage.......so you would still own the shares outright. I assume your dividends would continue to be paid.
> How long this might take, I do not know, but I was told it would be done as quickly as possible.
> ...


While the idea is to provide $1million, the question is where does the money come from? Is it on deposit? Or is it a levy against the other members, spreading out the pain?

Knowing how gov't and private corporations don't like to have money sitting around when "we know that only one company in 100 years fails", I can easily see where more failures than anticipated can have be big impact.

And yes, I'm sure if one did fail, assuming the shares hadn't been loaned out for options trading or weren't seized to pay bond holders - they will be transfered. However, it should also be easy to transfer RRSPs between solvent companies and yet it is so slow that the member companies have been complaining about it. In my case, the "one month trasnfer" took about three months - *for the same group of companies*. I hate to think how long it would have taken to transfer to a new company.

As for "only cash is frozen" - I'd expect everything to be frozen until the administrator has figured out what assets were around, what liabilities were owing etc. etc. Depending on the state of the books, this could take a while.


Personally, I hope it's a situation I never have to deal with.


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## Eclectic12 (Oct 20, 2010)

clovis8 said:


> I admit I am new to all this but some of the responses here just dont sound right to me.
> 
> Let's say I had a storage locker and the storage company went insolvent. They dont own my belongings. I assume this is how the brokerage works also. They are simply storing my personal property.
> 
> ...


Check with your broker.

From what I understand, the difference with the storage locker comparison is that you signup for a particular locker, haul your stuff up to it and lock it up. 

A closer version to what happens with a broker, it that you show up at the front desk and give your stuff over for a receipt. The storage company stamps their name/address to your stuff, in case they decide to rent it out. If they don't rent it out, they pick what locker to store it in.

If the storage company goes under, you have no idea what locker (if any) your stuff is in and all you have is a receipt. Until whoever is taking care of the bankcrupcy can confirm your receipt, find the locker it's in and confirm that someone else does not have priority to be paid first - you won't get your stuff.

And yes, it is similar to a bank - they will pay interest on cash in the account.
In addition, you are getting access to the exchange for easy trading, compared to a full
service broker. In that case, you have to call the broker, then they make the trade which is a much slower process.

Other benefits the broker takes care of are that you don't have to find somewhere to store your stock certificates. If the certificate is lost in the mail, you don't have to request a new one and prove who you are. You also don't have dividend cheques to cash as they are deposited to your brokerage account.

So the trade-off is that it is easier for you as you are dealing with one company instead of many. The other side is that the one company (the broker) puts their name on the stock and agrees to correctly keep track of what's yours.


As for the PS, the broker will claim that their "payment" is that the income from options allows them to offer cheaper trades etc.


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## clovis8 (Dec 7, 2010)

thanks for all the info. I was very helpful.


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## furgy (Apr 20, 2009)

clovis8 said:


> thanks for all the info. I was very helpful.


Yes , you were.


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## humble_pie (Jun 7, 2009)

it's even more depersonalized than that. You'll never see your original possessions again. When you surrender them, the storage company, which really is a trading company, will hand you a receipt for identical items with the same CUSIP numbers. From then on, CUSIP numbers are what you'll own, although you & the storage/trading company will use other names & symbols for what used to be your belongings.

the trading company is a complicated operation. All may have been quiet at the little counter called the cage where you got your receipt. But on the other side of the warehouse all the bays are open & all the loading docks rumble night & day with pallets of CUSIPS being trucked in & out. The company's business plan is to keep strictly fewer CUSIPs in the warehouse than they've been paid for at all times.

when too many owners of CUSIP receipts call for their goods to be sold, the trading company borrows CUSIPs. If they consistently borrow too many, the regulators take notice and the troubled trading company tries to get itself sold to a larger, stronger operation. In canada, this usually succeeds. John q public is told that 2 trading companies have merged. The warehouse stays open & the CUSIPs continue trucking in & out even though the names painted on the sides of the trucks have changed.

there's always the risk, though, that a troubled trading company won't be able to find a stronger partner. The worst will happen, and it will have to declare bankruptcy. The regulators will padlock the doors, freeze all operations & begin sorting out the mess. No CUSIPs can be moved or traded. Undoing the freeze can take months. It's only after the regulators have determined who owns what that the insurance companies move in to settle up.

this is why some people like to hand over their goods to bigger trading companies that have lots of strong connections in the first place.


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