Jim,

I’ve been reading your advice over the last 6 months re eliminating financial intermediaries between yourself & your assets not thinking for a minute that I might have been in harms way. The reason for my misplaced confidence was that here in Australia we have an electronic registry that goes by the name of CHESS which records either shareholder (SRN) or Holder (HIN) identifiers that matches all trades in Australia to individual issuers, shareholders, and/or their broker. This system of identification (above all) I thought was to serve to protect my assets from the bankruptcy of a broker. It would appear however that I have been sadly mistaken.

You would be familiar with the Australian based OPES PRIME brokerage failure – but what amazed me in this instance was that fully paid shares (including superannuation assets – ie 401K equivalent) were all seized by the broker’s margin lender and sold to recover margin loan debts of other clients despite the fact that going margin on Superannuation assets was not lawful at the time. It would appear that even though fully paid shares of clients were transferred in the CHESS system for sponsorship of OPES this did not prevent the bank seizing them legally when OPES went belly up. This prompted me to ask questions of my own broker to determine if my own superannuation holdings were potentially in harms way. What I found out was disturbing.

I was until a few days ago holding fully paid US based Precious Metal shares through a major (non bank) Australian broker. The local broker here in Australia were apparently using a major US bank as their US based broker who were holding the shares on our behalf. It turned out that this US Bank was also a margin loan provider to my broker. What I discovered after following the trail over a few weeks was:

** My US based shareholding was not recorded in the Australian CHESS system as it is exclusively for Australian Stock Exchange holdings.
** My Australian broker had signed over beneficial ownership of all their US based shares (including mine) to the US based bank as collateral for other margin loans despite the fact that my shares were FULLY PAID.
** In the event of a failure of the brokerage my shares would be seized & sold to recover the margin debts of others.
** Fully paid shares of Superannuation funds (Australian 401K equivalent) have no immunity to brokerage failure.

Whilst this above situation applied to my US based shares, It would appear (as illustrated by the Australian OPES PRIME situation) that whilst Australian based shares can be fully paid and subsequently transferred to any broker within the Australian CHESS system this will not protect your assets if the broker has done some back office deal with a margin loan provider giving them the right to seize the shares to recover someone else’s margin debts in event of failure. Now lets face it…how can we be sure that this hasn’t been done?

It seems that the likelihood of this problem arising with independent non bank brokers would be higher than with a broker who is a fully owned subsidiary of a major bank (which would also provide its own in-house margin finance) but I feel compelled to ask the question? What happens if the parent bank goes belly up and is considered one of the financial institutions that your central bank deems to have been “destined to fail”? My thinking is that in that circumstance you will also likely loose the lot...

So after all this I have adopted this general rule…. If you want full peace of mind that your assets are secure, and if you are unable to obtain the actual share certificates (such as in Australia where everything went electronic in 1998), and you havn’t any written advice from your broker to the contrary:

** Assume that your fully paid Australian & International shares have been handed over by your broker to a third party bank as collateral for someone else’s margin loans.
** Assume that if your bank owned brokerage is one of the banks not considered big enough to survive the coming derivative based financial meltdown… your fully paid shares will also likely be seized and sold to repay the broker’s & banks debts

Sound impossible? I reckon we will never know in all honesty what back office deals our brokers are doing (similar to OPES), even between banks and their fully owned broker subsidiaries….What do you say?

Needless to say, I have now reluctantly redeemed my US based shares for cash and have used the funds to purchase physical bullion that I am holding personally in a third party nonbank safe deposit facility. I am hoping that this is of interest to your readers. As always, I am highly appreciative of your advice without which I am sure I would have lost these funds in the future if I hadn’t acted.

All the best
CIGA Dav0