When it comes to purchasing and holding fixed and floating rate securities, investors typically have two options. They can become an Associate Member of Austraclear and set up their own Austraclear account, or they can rely on their bank or broker to hold the securities for them in Safe Custody, using the bank or broker’s existing Austraclear account.
In a previous Amicus article, we delved into the details of these two options, discussing the “Three C’s” that investors should consider when making a decision – Compliance (Risks and Security), Convenience, and Costs. Exploring this topic further we provide an update to our thinking under these three headings below:
Compliance
Our conclusions previously was there was no real difference with the risks in both choices; the main risk being a rogue employee of either the Safe Custody or Proxy provider illegally and fraudulently trading in the client’s Austraclear account (or sub-account) without the client’s permission. Our view was that if the service was provided by a Major Bank, this was more secure than if it were provided by a smaller organisation with less assets (such as FIIG, Laminar, Curve, ETOS), but only on the basis a larger bank would have the financial capacity to compensate a client for any loss, whereas a smaller organisation might be limited by the size of its professional indemnity insurance.
Claims that somehow if clients did not have an Austraclear account established in their own name they were not the legal owner of the securities we regard as “hogwash” with every Major Bank and broker willing to make the representation that the clients for whom they hold the securities are the legal and beneficial owners of those securities rather than the bank. Further this has been tested in the past with the default of Lehman Brothers Australia who held its clients’ bonds under this method. In general there was minimal disruption and no disputes as to the ownership of the assets.
One issue we did not explore in our previous article (which could be a Compliance issue for some organisations) is that every Austraclear Proxy or Safe Custody provider (except ETOS) is also a dealer in securities. This provides a side benefit to the banks and brokers providing the service which is one of the reasons they provide Safe Custody cheaply or at cost, and one of the reasons why Laminar as an active broker provides an Austraclear proxy service at all.
The operator of the Safe Custody or Austraclear Proxy account gains significant market intelligence having visibility as to which of its clients hold which bonds and at what prices those securities are traded in the secondary market which is effectively what is disclosed through a Safe Custody or Proxy service. Many will also use this to suggest or initiate trades for the holder that are beneficial to the bank or broker.
Convenience
Amicus concluded in terms of Convenience, Austraclear Proxy enjoyed a small advantage which grew for holders of multiple securities not having to hold their securities with different banks or brokers, but rather having them held in one place being Austraclear.
Another Convenience aspect that has become more significant is when the Major Banks issue domestically, they typically do “self-led” deals as sole managers. Therefore, if it is CBA or NAB, these banks will provide Safe Custody for free, ANZ will charge 7bps and Westpac does not offer the service. This is not an issue for those that use Austraclear Proxy, but makes purchasing Westpac and ANZ deals at new issue more cumbersome or costly for those relying on Safe Custody.
In recent market developments, Curve Securities is offering a paid service for 5bps taking all bonds regardless of whether they have been purchased through Curve. This allows investors to hold all their bonds with one provider negating any convenience arguments although most investors seem to be holding their bonds with CBA where they can enjoy free safe custody service and any other bonds not sold to them by CBA with Curve.
Costs
Regarding Costs, most of the expenses of Austraclear Proxy are fixed (and run into thousands of dollars). For investors with larger holdings, the lowest cost solution typically depends on the Safe Custody fees charged (if any). Whereas the costs (if any) of Safe Custody are variable so smaller holders are nearly always better off with Safe Custody.
As mentioned previously, Curve Securities has become more active in the market offering Safe Custody services for a fee of 5bps. Barrenjoey, a relatively new market entrant, is looking at its options in this area to facilitate more client flow. NAB’s service is currently suspended awaiting outcomes of discussions with their custodian.
The cost consideration largely comes down to size of holdings. For those with a $20 million portfolio, paying Safe Custody fees of 5bps that is a cost of $10,000 annually which will likely cover the first year costs of maintaining an Austraclear account.
If you would like to discuss the key considerations for choosing between Safe Custody and Austraclear Proxy, please don’t hesitate to contact Amicus. Our Amicus service for retained clients includes guidance on any developments and updates related to this area which remains dynamic with a lot of ongoing changes.
