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Investment Segregation

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For those of us who don't have all of our wealth tied up in our own home and/or BTL then this "news" is well worth digesting and pondering. Barclays have been fined £38M for failing to keep £16.5B of its clients assets separate from its own over a 5 year period which included the period when they were being 'bailed out'. The BBC calls it 'a record' and Barclays say 'it did not profit from the issue and no customers lost out'.

Personally my own musings smell rotten fish and suggest it's neither a deterent or a punishment that fits the crime. It also requires me to alter my investment approach going forwards.

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The temptation to keep themselves afloat using client's money is simply too tempting when you get to their position.

Didn't that happen at that big spreadbetter a couple of years ago too? They're no better than a bucket shop.

Kept themselves afloat in a variety of dodgy ways including lending its people money to buy up parts of itself like the bombed out assets right at the very bottom of the market - I wonder if Diamond profited from that trade of the century in some way? Lending Qataris money to take stakes in itself. And now apparently they have misused client money in some foul way.

Would not touch this culturally toxic company with a barge pole.

I don't have any investments with Barclays (their expenses are way out of line with what I'm willing to pay given I want to use my investments to help retire early and not to pay for investment banker yacht's/Ferrari's/etc) so am not so concerned with Barclays per se (others of course should be). My concern is more around how easy it looks be to do with very large sums and for very long periods, then when they're caught with their hand in the cookie jar the regulator couldn't give a s**t.

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Used to work in a hedge fund and I never saw a single "client funds segregation" agreement that I would trust. Even having US treasuries lodged with a 3rd party was rarely good enough unless you could negotiate mutual agreement required on all movements of capital (forget it if you haven't got soverign wealth fund sizes of money to invest). Read about MF Global to see what happens when client funds are segregated and you have a lord of the universe in charge. It's no different for any bank in any country and the banks are so complex unwinding the mess is almost impossible. It's great to see Barclay's get fined for it but every investment bank should be fined a hell of a lot more than 38M for mixing of client funds (or preferably broken up).

As a retail client you have less risk because the government is likely to at least bump you up the list of creditors for pay outs and make you good reasonably quickly. This is very likely because the real insiders will take their money out before the bank goes down so politicians would likely have nobody left to grease except the angry mob outside their gates.

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I've come to the conclusion it's virtually impossible to hedge against.

If you hold ETFs it's not just the ETF provider it's the bank they're using as a counterparty so you have the Barclays problem or the rehypothecation of the govt. bonds that back the index they're tracking.

If you hold equities directly it's the registrar or the bank nominee company.

If it's an insurance fund then it's not only the insurer but the banks again.

And so on.......

This is the point where the gold bugs will say gold has no counterparty which of course is nonsense since gold is the first asset to be dumped to raise liquidity when dollar liquidity dries up.

Nonetheless it seems sensible to at least attempt to spread it around ETF providers, equity nominees, banks and so on if you can.

DFwiw I suspect at some point in the future someone will be asking why didn't anyone notice the build up of correlations in the ETF/Insurance industry when one of these mega names goes t1ts. Central banks have flagged up the synthetic commodity ETFs (especially the leveraged ones) but they're usually run by the same providers running non-leveraged ETFs and they're nearly all backed by USTs. It would be very odd, given this is the banking/finance industry, if one of them didn't blow up at some point.

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This is the worry that keeps me up at night.

I have a lot of wonga with one ISA provider and while I know the law about client accounts, I still have the odd sleepless night over it. I really must get round to spreading it around a bit. Problem is, I can't remember if partial transfers out are allowed. Next ISA year I'll start with a new provider! I've got in this situation through laziness - opening new accounts is a KYC nightmare these days and it's so much easier just to tip more money into existing accounts.

If weren't for the fact these are ISAs, I'd go over entirely to certificated holdings (of which I have a few already - and quite like getting cheques!).

I'm not worried about cash ISAs as I don't have any. Don't have much cash in fact!

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I've come to the conclusion it's virtually impossible to hedge against.

If you hold ETFs it's not just the ETF provider it's the bank they're using as a counterparty so you have the Barclays problem or the rehypothecation of the govt. bonds that back the index they're tracking.

If you hold equities directly it's the registrar or the bank nominee company.

If it's an insurance fund then it's not only the insurer but the banks again.

And so on.......

This is the point where the gold bugs will say gold has no counterparty which of course is nonsense since gold is the first asset to be dumped to raise liquidity when dollar liquidity dries up.

Nonetheless it seems sensible to at least attempt to spread it around ETF providers, equity nominees, banks and so on if you can.

DFwiw I suspect at some point in the future someone will be asking why didn't anyone notice the build up of correlations in the ETF/Insurance industry when one of these mega names goes t1ts. Central banks have flagged up the synthetic commodity ETFs (especially the leveraged ones) but they're usually run by the same providers running non-leveraged ETFs and they're nearly all backed by USTs. It would be very odd, given this is the banking/finance industry, if one of them didn't blow up at some point.

Well, this kind of MF-Global style behaviour is one of the main reasons I own gold. Not an ETF / paper, but the actual metal in a box.

If one of those mega names goes tits, then it WILL not be contained; they will ALL be affected, since derivatives notional becomes nominal at that point, and someone somewhere ends up being owed $40 Trillion. Can we say Cyprus bail-in + bank-holiday?

EDIT - i also remember Ann Barnhardt closed her live cattle futures brokerage business because she became aware that her clients funds were not segregated.

Edited by weaker

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As a question rather than a statement..

Why is this important?

Banks are so opaque that nobody really knows whether their money is safe. I have never seen a share certificate, I have never checked to see whether the money in my current account is actually in the vault with my name on it.

The last crash seemed to demonstrate that no government is prepared to let a bank fail because of the knock-on effect to confidence on other banks (Lehmans always being presented as the biggest mistake of the crash).

So.. If no bank will be allowed to fail why the need to segregate customer and banking assets?

I presume there is something fundamental I am missing? Why are my shares and savings less safe now than they would be if they are segregated? Or is this simple not about the retail banking side of things?

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I think under the new rules, the EU has mandated bail ins rather than tax payer funded bailouts. This covers the UK too.

The trouble with non segregated accounts is it allows the banks' bad bets and bad debts to persist for longer than they otherwise would allowing to position to keep on deteriorating whilst they hope things turn around (this is the process that we see with rogue traders hiding their losses), to the point where client accounts are threatened.

This is why I was bounced into getting a property in Australia before I was ready to - one of the few methods of risk diversification I could legally access. Hopefully nothing will go wrong in the next few years, but if it does at least we do not have all eggs in one basket.

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For those of us who don't have all of our wealth tied up in our own home and/or BTL then this "news" is well worth digesting and pondering. Barclays have been fined £38M for failing to keep £16.5B of its clients assets separate from its own over a 5 year period which included the period when they were being 'bailed out'.

Neil Woodford is one of the UK's most highly regarded stock pickers, he ran the income fund that probably produced the best long term results over the past twenty years. He recently announced that he was selling his entire holding of HSBC (the only bank in his portfolio). His reason was that he believed banks were increasingly vulnerable to "predatory fines", governments essentially fining banks as a money raising exercise pure and simple. £38m to Barclays is neither here nor there, but if there are billion pound fines waiting in the wings then HSBC's attractive dividend policy will not longer look so secure.

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...It's great to see Barclay's get fined for it but every investment bank should be fined a hell of a lot more than 38M for mixing of client funds ...

Exactly. The fine to me says that the FCA couldn't give a s**t. It equates to only 0.23% of the customers assets that could have been lost. As I mentioned in my musings "for me this is neither a deterrent nor a punishment that fits the crime. "

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This is the worry that keeps me up at night.

...

It's in situations like this that I understand why people buy over priced houses for both BTL and to live in. Sure these can lose 50% of value but at least will still be standing afterwards. A company not segregating your assets which then blows up and your investments could go to zero. Would be a complete waste of the last 7 years of my life during which time I've worked like a maniac to build 76% of the wealth I'll need to become financially independent.

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I think under the new rules, the EU has mandated bail ins rather than tax payer funded bailouts. This covers the UK too.

...

That's my understanding as well. Next time (note I didn't say if there is a next time) we end up owning shares in a worthless bank or other financial institution. Maybe I should be buying an overpriced house instead. At least I can live in that.

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That's my understanding as well. Next time (note I didn't say if there is a next time) we end up owning shares in a worthless bank or other financial institution.

And they won't just be shares, they'll be shares you aren't allowed to sell until some distant future date, and somebody else will have the power to change that date at will.

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It's a different topic, of course, but bail-ins are exactly what should happen. Taxpayer bail-outs while bond holders in risky enterprises keep their loot is simply wrong.

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It's a different topic, of course, but bail-ins are exactly what should happen. Taxpayer bail-outs while bond holders in risky enterprises keep their loot is simply wrong.

I agree with you 100%. If only free market risk vs return across all asset classes could have been allowed to play out over the last few years we might not find ourselves in the current mess we're in.

Edited by wish I could afford one

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