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Are your investments safe if your broker goes bust

by , 01 April 2020
Are your investments safe if your broker goes bust
This week I received a mail from a client asking me “How can I be sure my broker doesn't run away with my money - or that my investments are safe with them?”

At first I thought it might be a bit dramatic - worrying about these things right now. But then I thought about the 2008 financial crisis and how Lehman Brothers went belly up. Lehman Brothers was one of the largest brokerages and investment banks in the US at the time.

In South Africa Dealstream Securities also went bust in October 2008 - an infamous case of a broker that went bankrupt locally, with lots of probes and court cases followed…

So, what should you look out for to ensure your money and investments are safe?

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What happens when my broker goes bankrupt
Let's be clear: I'm talking about what happens if your brokerage firm goes bust.
Not: What happens if your investments lose their value due to market conditions.
But: The answer to what happens with your investments DOES depend on the broker…
So firstly – I would strongly urge you to ensure your broker is FSCA regulated and registered as a full-member of the JSE.
If this is the case – your money should be in a segregated trust account. This account gets audited and all cash in the account is insured against theft, fraud and other mishaps like default of a brokerage.
What’s more, JSE members have to have enough capital on hand for at least 13 weeks’ worth of operational expenditure.
And the JSE regulates this to ensure the broker is reputable and not likely to go belly up.
When you buy shares on the JSE you’ll see you pay an ‘investor protection levy’ equal to 0.0002% of the trade value.
This money is used by the JSE to pay for a massive insurance policy that will cover your losses up to a certain point.
The reimbursement under the JSE’s guarantee fund is limited to R500,000 per claimant.
Now, what about your share investments – are they safe if your broker goes belly up?
When you buy a share in a company – the transaction is settled through a clearing house. In South Africa this is called Strate. 
In their own words Strate is: “tasked with the safekeeping and administration of securities and financial instruments on behalf of third parties. It is also responsible for the settlement of these securities - where the corresponding cash is delivered and received to complete a transaction between sellers and buyers of those securities. This custody and settlement role is the core service provided by Strate to stakeholders across the bonds, equities and money markets.”
So, the shares you buy through a broker are kept ‘digitally safe’ with Strate.
The shares should be kept in your name, and not that of your broker or intermediary.
That way no matter what happens to your broker – your shares are safe.
If for instance your broker went bankrupt, the JSE would simply contact you and provide you with the option to move custody of your account to another JSE member.
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When are your investments or money not safe?
If you give money to a friend, a colleague or anyone else that is not a JSE member you are in for trouble.
Firstly – it is illegal for anyone not registered as a financial service provider to take your money and invest it on the market.
Secondly – if they go bust, you’ll lose your cash and investments.
Now here’s the other problem, there are brokerages (especially in the Forex and Commodities trading realm) that are online only and not regulated in South Africa (and sometimes not regulated at all).
Often, they take your money into a pooled account, and that means you will be exposed if such a broker goes bankrupt. What’s more – becuse they are notregulated in South Africa you have very limited recourse if you encounter any problems…
So what should you do if you are uncertain?
If you are uncertain at all you should mail your broker and ask them two questions: 
1. Is my cash in a segregated account audited by the JSE?
2. Are you a full JSE member – or do you invest my money through a full JSE clearing member?
Any reputable financial services provider should be able to answer these questions clearly, without hesitation.
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares  

Are your investments safe if your broker goes bust
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