Brokered CD Question

txFish1 | Apr 30, 2023 | 476 posts since 2023

I have an account with Fidelity and as I am close to retirement have converted most of my funds to CD'S, Treasuries and money markets. I know that brokers buy large issues directly from the banks and then sells them to their customers. My question is does the Broker then register the CD with any reference to XYZ customer with the bank so if the bank failed the FDIC would have a record of it? I called 2 different departments at Fidelity and both answers were pretty vague.

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Answers

MAKNYC | Apr 30, 2023 | 323 posts since 2015

I’m pretty confident that the banks do not know the true ownership at a given point in time, nor does it matter. It’s only in the event of a bank failure liquidation that the regulator in charge (FDIC or NCUA) would query the nominee brokers to determine true ownership. Key to this is the fact that brokered CD’s change ownership subsequent to issuance via secondary market trading and trading brokers actually inventory CD’s as they purchase from a seller but haven’t yet matched with a buyer. I would be shocked if banks would tolerate daily ownership record changes and the massive logistical undertaking for no beneficial reason.

txFish1 | Apr 30, 2023 | 476 posts since 2023

So the initial underlying purchase of the CD from the broker is FDIC insured and it is up to the broker's soundness and also record keeping to make sure the funds get back to the retail customer?

Marfa | Apr 30, 2023 | 68 posts since 2022

I remember when looking at the pros and cons of brokered versus bank cds , that if a bank fails , the bank’s cd owners get paid before brokerage firm’s cd accounts.

txFish1 | Apr 30, 2023 | 476 posts since 2023

@Marfa that would make sense as the bank or CU would have your direct info so the FDIC or NCUA could process it quicker.

MAKNYC | May 1, 2023 | 323 posts since 2015

If a bank fails and liquidation is the option pursued by the regulator, they will pay off direct covered deposits within a day or so based upon the issuance banks records. They will also query the brokerage community to supply the names, SS# and account titling of the brokered CD holders at the point of failure. The regulator would then compare that provided info to the direct holders that were already paid to determine if any brokered CD holders overlapped with the direct holders (that were already paid) to determine if there are any exceeding the insurance limits. For example, for simplicity, the bank issued $30 million of a particular cusip’d CD. $10 million is held at each of Schwab, Fidelity and Merrill Lynch. Each of the three firms then supplies the relevant list of holders of $10 million to the liquidating agency. The $10 million at each firm could be different than what it was on issuance day as some original holders sold and new investors bought. It’s actually pretty simple and not amenable to a broker screwup.

In many ways this is the same way all other investments are tracked. For example, IBM has no idea who most of its beneficial owners are on a given day, nor would they care. On a record date for a stockholder vote they would do a similar query and their information agent would forward relevant supporting materials to those holders and allow collecting of their votes.

txFish1 | May 1, 2023 | 476 posts since 2023

Thanks MAKNYC! So even though they are FDIC insured they are treated more like a security (stock or bond) as far as record keeping is concerned. Probably no less secure as if I had bought it directly from the FI but may take a bit longer to complete the process

Infinityy | May 1, 2023 | 107 posts since 2020

Correct, the brokered CD's are held in "street name," see https://www.sec.gov/answers/street.htm

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