SGX broadens adoption of broker custody accounts

[SINGAPORE] Moves are afoot to get more Singapore investors to adopt broker custody accounts and align the Republic with practices in markets such as Australia, the United Kingdom, Hong Kong and the United States.

The Singapore Exchange Regulation (SGX Regco) is consulting on rule amendments to enable omnibus broker custody accounts, require brokers and depository agents to support clients in exercising shareholder rights, as well as to strengthen the regulatory framework for depository agents to ensure robust oversight.

The consultation is open from Friday (Jan 30) until Mar 27, and retail investors may continue using direct accounts even after the changes take effect.

Currently, Singapore investors hold their SGX securities either in direct accounts with the Central Depository (CDP), or through broker custody accounts, also known as sub-accounts. About two-thirds of retail accounts in CDP are individually segregated direct accounts, and the remainder are broker custody accounts.

A CDP account, operated by the Singapore bourse, acts as a secure storage for SGX-listed stocks owned by an investor. In contrast, a broker custody account is held under a broker, who manages the investor’s holdings.

Many retail investors who maintain direct CDP accounts for SGX-listed stocks also hold foreign-listed shares in broker custody accounts, usually on an omnibus basis – a pooled account that combines the assets and trades of multiple customers under a single broker.

If investors adopt the same broker custody model for both their SGX-listed and foreign-listed securities, they can view and manage all their holdings together through the same broker.

Brokers will also be able to offer investors more value-added services, such as fractional trading, portfolio management, robo-investing, as well as other innovative products and services.

Apart from the benefits to the investor, there are advantages for the wider market as well.

SGX Regco said that these changes could attract more internationally active asset managers, who are used to omnibus structures in other markets, but must currently maintain a separate system to accommodate individually segregated accounts when operating in Singapore.

It will also be easier for them to participate more actively in the city-state’s stock market, enhancing Singapore’s competitiveness as a trading and investment hub.

The proposals come as many investors, already trading on online platforms, hold their SGX-listed stocks in broker custody accounts, observed Ang Hao Yao, vice-president at the Securities Investors Association Singapore (Sias).

Luke Lim, chairman of Securities Association of Singapore, said that under a broker-custody model, brokers will have clearer visibility of client holdings and transactions.

This enables “stronger post-trade monitoring and more consistent custody arrangements under appropriate oversight”, he added.

Evy Wee, regional head of wealth platforms and solutions at DBS, believes that it is timely for SGX to put forward the proposed amendments to broaden the way customers’ financial assets, such as equities and bonds, are custodised, amid growing interest in financial markets among retail investors.

This will mean that customers can safekeep their SGX securities and government-issued bonds with a brokerage or bank, integrating them with their existing non-SGX investing holdings, she noted.

“The latest move will enable retail investors to custodise their financial holdings as part of their overall investment portfolio which, up until now, have largely been made available to high-net-worth investors only,” added Wee.

Rule changes to the custody model

The proposals follow the Equities Market Review Group endorsement of modernising Singapore’s post-trade custody infrastructure and its recommendation to introduce supporting measures to ensure a smooth transition for market participants moving towards a broker custody model.

A SGX spokesperson told The Business Times that the proposals SGX RegCo is consulting on address two key matters: the safety of assets and that shareholders continue to enjoy their rights.

To achieve this, a legal framework already exists to ensure assets in broker custody accounts are properly safeguarded and segregated from the broker’s own assets.

“What we are proposing is to enhance the supervisory framework, giving SGX a comprehensive toolkit for inspection of brokers/depository agents and enforcement powers to ensure brokers/depository agents adhere to the legal framework,” the spokesperson said.

CDP direct accounts are a “legacy construct” from the days when physical share certificates needed to be safekept, noted Yujun Lin, CEO of Interactive Brokers Singapore.

Even now, he said, there is still a lingering perception that storing an individualised electronic record of shareholdings in a central depository is “safer for the investor”.

Sias’ Ang stressed that wider adoption of broker custody accounts requires tighter regulations, as clients’ holding information will be more transparent to brokers.

Issues such as PDPA (Personal Data Protection Act) compliance and cybersecurity need to be addressed to maintain trust.

“Sias also urges regulators to ensure that the omnibus arrangement is as secure as holding stocks under the CDP,” he said.