For most investors, there are two choices if they wish to buy and hold fixed and floating rate securities. They can either join Austraclear as an Associate Member and have their own account with Austraclear, or they can ask their bank or broker to hold the securities for them in safe custody within the bank or broker’s own Austraclear account.
The best choice for each investor comes down to consideration of the “three C’s” being Compliance, Cost and Convenience. We outline below a cursory and general assessment of these factors without taking any specific investor circumstances into consideration.
In practice for those electing to have their own Austraclear account a “proxy” is required as to undergo the compliance regime and training to operate the account themselves is prohibitively expensive. This introduces a risk in that they are giving a third party full access to trade their holdings. If the third party did anything without the client’s authority that would be a compliance breach, or if it was done covertly to obtain an advantage it would constitute fraud. The same issue also arises under the safe custody option where the holding bank or broker trades the client’s securities held in safe custody within a segregated account of the bank or broker’s own Austraclear account.
Amicus notes the safe custody method survived the 2008 collapse of Lehman Brothers Australia when all client holdings (which were held safely by the custodian Citibank) were then transferred en masse to ANZ who took over the service with minimal disruption for clients. Similarly, during the 2013 collapse of Oakvale Capital (as Austraclear proxy services provider) there were also minimal issues arising regarding the safety or security of client holdings. Hence Amicus concludes both methods are broadly equally as safe with the largest risk being one of a rogue employee committing fraud under either method and the employee’s organisation not having the financial capacity to subsequently make the client whole. This is one reason we generally recommend safe custody with a major bank rather than a smaller broker.
Most of the costs of Austraclear proxy are fixed (and run into thousands of dollars) whereas the costs (if any) of safe custody are variable so smaller holders are nearly always better off with safe custody. For investors with larger holdings, the lowest cost solution typically depends on the safe custody fees charged (if any).
After the initial set-up, Austraclear proxy is generally more convenient, particularly for holders of large numbers of securities.
As part of Amicus service to our retained clients, we recently completed a far more in-depth assessment of all these factors our clients should consider when deciding whether safe custody or Austraclear proxy is the best solution for them. Please call Amicus if you would like to discuss this topic further.