What is the CDP account for?

Coftea , 4 Comments

I was having a casual lunch chat with my colleagues on the stock market and was pleased that my first attempt to explain the concept of long versus short, call versus put option was successful. But asked a simple question on what the CDP account is for, I found myself tongue tight. It is… a depository to hold my stocks and… perhaps my holdings inside are guaranteed in certain ways?

How ignorant was I! Very ‘malu’ to call myself a stock investor. I knew I had a CDP account from the start when I registered my first Philips Capital trading account. From then on, I dealt mostly with my trading account and the CDP account was ignored. There is no excuse to be uncertain of a fundamental concept like this, so I am here to seek redemption.

What is CDP?

CDP is a private company fully known as Central Depository Pte Ltd and is wholly owned by Singapore Exchange Ltd (SGX). The main thing to know is that CDP is a MAS regulated central depository for securities in Singapore, and it provides securities accounts, central safekeeping services and administration of corporate actions (e.g. dividend, share split). On top of that, it also provides clearing and settlement services. We can simply think of them as backend documentations and movement of money that happen after a trade is done.

What does a CDP account do?

First of all, CDP account is different from a trading account. A trading account, held with a brokerage is to execute trades. Poems and Vickers are trading accounts which we can use to buy or sell stocks. After the trades are executed, the purchased stocks will be held in the CDP account, where CDP serving as the central depository has the obligation to safeguard our holdings. I see CDP as my holdings account, a warehouse of stocks where I can buy and store stocks and sell them subsequently if I wish to.

As most brokerages are using CDP as the holdings account for Singapore stocks, having a CDP account has added benefits. We also know that brokerage firms can hold our stocks, serving as our custodian. One popular example will be the Standard Chartered Online Equities Trading platform, where purchased stocks are held in their custody. So must we have a CDP account to start investing? Turns out no.

Why have I chosen CDP?

I remembered the main reason was that my stocks deposited in a CDP account belongs to me. Imagine securities as pieces of paper and my name is on the beneficiary field. In contrast, stocks in a brokerage’s custodian account belongs to the brokerage. That is not to say I don’t own the securities, but the brokerage is buying with their name and allocating the stocks to me with certain legal bindings.
A CDP account statement under my very own name. It just feels better.

What are the advantages using CDP?

Here are a non-exhaustive list of things I have came upon:
  • One of the cool thing of holding securities is the eligibility to attend AGM and participate in voting. I don’t do this, but it is good to know we have a stake in the company’s future as a shareholder.
  • Singapore stocks stored in CDP can be traded with any brokerage that is linked to it. For example, if we have bought Sheng Siong through a CDP linked Poems account, we can sell it through another CDP linked UOB Kay Hian account. It is named Central Depository for a very good reason.
  • Corporate actions, such as rights issue and dividend reinvestment plan (DRIP) are notified to us directly by mail. We can then take actions based on what is stated on the letter. For stocks held under brokerage’s custody, we might have to wait for a call from them to ask for our decision.
  • There are no charges to maintain a CDP account and for their service to handle dividends. On the other hand, brokerage firms might charge handling and processing fees for their custodian service. For example, Philip Capital Cash Prepaid Account charges S$16.05 per quarter if no single trade is made within an assessable quarter.
  • Dividends will be paid on the ex-date and credited to our bank accounts directly.
  • Holdings in CDP is absolutely safe. We needn’t worry about CDP going bankrupt with our holdings. If that happens, it means SGX or even Singapore is going down anyway.

What are the disadvantages using CDP?

Two main disadvantages I could think of:
  • CDP can only be used to store Singapore securities. For foreign trades, we must open a custodian account with our brokerage firms.
  • Commission fee might be higher with CDP account as I suspect it is to the benefit of the brokerages to be in the custody for our securities too. We can see this with Standard Chartered trading account and Philip Capital Cash Prepaid Account which holds your securities in their custody and charges 0.2% and 0.18% commission respectively on SGX. This is in contrast to 0.28% charged by Philip Capital Poems and DBS Vickers Online accounts which uses CDP to hold your stocks.

经一事,长一智. Gain knowledge for each encounter. The journey is long but let's take one step at a time.

Coftea

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4 comments:

  1. What happened to your stocks when Lehman brothers collapsed?
    i understand it was very messy to sort who owns what and how much.

    i avoid custodian account if i can.
    Is my US stocks at Computershare and Well Fargo bank considered as custodian's shares too?

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    Replies
    1. Hi temperament,

      Your questions are really tough and it shows how little I know :( I don't have experiences dealing with the 3 banks you mentioned, so I'll share what I know just for discussion.

      When a brokerage firm goes bankrupt, past experiences suggest some other firm(s) will do a buyout. In this case, the new owner assumes the liability to safeguard our holdings. And even if the bankrupt firm is forced to liquidate without any buyers, there might be policies like SIPA in the US that provides limited coverage of up to $500,000. Investors may not lose it all. Back to Lehman brothers.. It was broken up and acquired by numerous players in the space, I guess what happens to the stocks depends on who acquired the arm that acts as the custodian.

      Your accounts with Computershare and Wells Fargo, are they trading accounts? I'm not sure about the arrangement as each brokerage firm might be different.

      Actually, it's hard to avoid custodians unless our brokerage firm is really really big. If we were to buy foreign stocks through local brokerages, most likely our stocks are kept in a pooled nominee account to reduce cost and facilitate transactions. I think the least we can do is make sure our brokerage firm is of good quality to make sure their assets (which belongs to us) are well protected when their custodians face problems.

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  2. I was doing a bit of reading recently and contrary to my belief, the concept of "CDP" is the minority rather than the majority in global context.

    In theory, for custodian/nominee accounts, the broker can now move and sell the securities on my behalf and takes care of all the administrative stuff and paperwork – but the assets still belong to you. They can’t be claimed by the broker’s creditors if things go wrong.

    Some useful readings I've found -
    http://monevator.com/nominee-accounts/
    https://the-international-investor.com/investment-faq/stock-broker-account-safety

    Nice article Coftea - just what I needed since I was also looking up info on this topic :)

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    Replies
    1. Hi Kevin,
      Thanks, the pleasure is mine when my article proved to be useful to others somehow :)

      Your readings are actually the same as mine! haha. I was also surprised when I realized that having a central depository in a country is not a norm. As mentioned in the-international-investor.com article, one other country is UK where investors can opt for a CREST account. However, from my readings, it seems uncommon for common investors (no pun intended) to opt for it and brokerages can even charge additional fees for enrollment. Looks like we folks in Singapore are enjoying the benefits like having annual reports sent to us, up-to-date info on corporate actions and privilege to attend AGM free of charge :)

      Delete