What happens when your broker goes bust

The Johannesburg Stock Exchange (JSE) has several protections in place for when a broker becomes insolvent, but not all financial service providers (FSPs) fall under this protection.

Director of market regulation at the JSE Shaun Davies told Daily Investor that it is important to distinguish between the two different ‘brokers’ in South Africa – JSE member firms and FSPs.

While both operate as brokers in the country, JSE member firms adhere to the JSE’s stringent rules and offer specific protections to their clients in the event of financial failure. 

However, not all brokers fall under this category, as some operate as FSPs licensed and regulated by the Financial Sector Conduct Authority (FSCA), and the protections in such cases could differ from JSE member firms.

For example, one measure employed by the JSE is the requirement for clients’ shares to be deposited in a segregated securities account with a participant in the Central Securities Depository (Strate). 

If a broker becomes insolvent and clients’ shares are held in this segregated account, they will be returned to the clients. 

In addition, clients’ securities do not form part of these brokers’ assets, which provides an additional layer of protection.

However, should it happen that some securities were not deposited as required, the JSE’s investor protection arrangements come into play. 

JSE equity market brokers are covered by an insurance policy designed to protect clients whose securities have been misappropriated by the broker. 

The JSE Guarantee Fund provides limited coverage, with a maximum value of R500,000 per claimant, subject to the aggregate limit based on the Fund’s total net assets at the time.

While these protections are in place, Davies highlighted that there has not been an insolvency of a JSE equity market broker for well over two decades. 

He said the last known insolvency in the late 90s saw most clients’ securities returned, with the JSE insurance policy compensating affected clients for securities not held in custody as they should have been. 

However, Davies said the transformation brought about by the dematerialisation of securities and the introduction of Strate as a Central Securities Depository significantly enhanced controls to safeguard client assets.

He also addressed the emergence of ‘fractional shares’ in South Africa’s financial markets, saying they are not a JSE product and are not currently offered by JSE member firms.

Fractional shares, offered by FSPs, are contracts-for-difference (CFD) – an over-the-counter derivative instrument that provides the holder with exposure to the underlying share but not ownership of it.

“We cannot comment on the impact of the insolvency of an FSP on ‘fractional share’ CFDs held by clients of the FSP, as the JSE does not regulate that activity, but it is likely that the counterparty to the CFD will be the insolvent FSP,” he said.


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