BROKERED Cds ON SECONDARY MARKET

Moonshot12 | May 25, 2023 | 3 posts since 2023

I am considering buying brokered CDs on the secondary market for the first time. Fidelity is the brokerage I plan to use. Any insight or advice the community can provide would be greatly appreciated.

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Answers

MAKNYC | May 25, 2023 | 323 posts since 2015

This is specific to Fidelity’s platform….they do not include their markup in the price/yield quotes. So when you query availabilities you may see many attractive offerings. But once you include their commission of $1 per $1000 FV the CD becomes unattractive. They designed their interface so that you don’t see the final price/yield until the final order confirmation screen. This annoyance becomes especially relevant as the time to maturity decreases.

WMSPNS | May 25, 2023 | 2 posts since 2023

I have some with Fidelity and have some insight and also some questions hopefully someone here can answer. I have a brokered cd that did not pay interest, I confirmed this with Fidelity. Fidelity said that the bank has 10 days and then it gets a notice from Fidelity that interest payments were not received. I decide that this bank will likely default and I'm only down $80.00 from the purchase price so I will sell the cd's on the Fidelity market. When I attempt to sell, the sell order will not go through because the minimum order to sell is 15 and I only own 14, I was not aware this was a requirement. Then I decide to test a sale of a cd I own more than 15, I just took it as far as the preview, I did not execute the order, however anticipated amount received is under what the Fidelity stated current value is by over $1500,00. When I purchased these cd's I understood that they were marketable securities and that the current value was what they were worth but neither appears to be the case. I find very limited information on Fidelities website. Does anyone here have more experience with brokered cds and understand the procedures that Fidelity implements?

txFish1 | May 25, 2023 | 476 posts since 2023

@WMSPNS I too have a fidelity account and I have never heard of a CD that could not be sold because of quantity. I just recently sold off a small CD that was only $5000 (5 cd's) in their secondary market and it went through with no problem. The one issue that comes up with small quantities is usually you are offered much less than if you sold $250K (250) as the buying broker can make more money on larger quantities. As far as Fidelity's current value on the CD it is really just a 3rd party price and is more of a guideline than what the security is actually worth in the secondary market the day you are trying to sell. Case in point I have some 5 year non-callable 4.9% CD's that show a price of 99.2 as of last week when I looked at it and I know I would probably get more than that if I sold them

WMSPNS | May 25, 2023 | 2 posts since 2023

txFish1 Thanks for the info that helps explain the secondary sales amount. But today I'm still seeing a minimum of 15 required to sell, can't figure it out.

txFish1 | May 25, 2023 | 476 posts since 2023

WMSPNS Are you requesting a bid quote on it? If you are not it may be just that there are current bids on that CD in the market already and they are requiring a minimum of 15.

MAKNYC | May 26, 2023 | 323 posts since 2015

WMSPNS. I’m thinking there is more to your story then you have disclosed as the facts you mention don’t add up to me. To my knowledge brokers only sell CD’s that are FDIC insured. If as you say an FDIC insured bank didn’t make a contractual interest payment that is a default. Period. First, that never happens. And if it did that entity has failed. Period. It would be taken over by the regulator…FDIC or NCUA. And as a depositor you would receive your funds in days or the CD would be assumed by another institution. The funds, including accrued interest, would be paid by the insurance fund if the FI didn’t have enough to cover them. Perhaps this is a puny bank and there is some sort of minor payment processing issue, but I wouldn’t expect any more than a day or so would be allowed.

As for the minimum trade size, this is more of an educated guess. Fidelity has relationships with brokers that make markets in CD’s. Those firms do it for profit. It might not be worth their effort to acquire a small amount of a CD at any price resembling fair value, hence the stated minimum. Even if they didn’t have the minimum, I’m guessing the $50 or $100 that the trading firm would expect to make + Fidelity’s commission would make such a trade financially unattractive to you.

txFish1 | May 25, 2023 | 476 posts since 2023

I have an account at Fidelity and everything MAK says is true. I recently spoke with my contact at Fidelity and asked him about how Fidelity registers the new issue CD's that I buy from them and he gave me the rundown but the one thing he did not give me assurance on is if I bought a secondary market CD that was on the Fidelity website but is listed by another broker how that CD is registered. Still waiting to hear back from them. Maybe someone on DA knows the answer to this

MAKNYC | May 25, 2023 | 323 posts since 2015

txFish1 Registration of brokered CD’s has been discussed in earlier posts. While I am very confident of this answer, I can’t classify it as a certainty, but others concurred in the earlier discussions. In a nutshell no brokered CD’s (primary or secondary) are registered in the owners name on the banks books. Similar to other investments the CD’s are held in street name. It’s only in the event of a default and dissolution (and if deposits above insured thresholds might not be honored) that the controlling regulator (FDIC or NCUA) would query brokers as to the actual beneficial owners at the moment of default. This is why brokered CD’s are not settled immediately upon a dissolution of the financial institution. The regulator will compare all brokered CD beneficial owners across all brokerage firms with the holders of direct accounts at the FI that were already settled to determine if any beneficial owners exceeded insured limits when combining their holdings directly at the FI as well as across brokers. Secondary market trading of brokered CD’s would likely be way too cumbersome if the financial institution had to update their records each time ownership changes.

txFish1 | May 26, 2023 | 476 posts since 2023

@MAKNYC I understand that if I buy a new issue CD from Fidelity they register it in street name. If I bought a secondary market CD on Fidelity's website that was owned by ABC Broker would Fidelity have to also register it in street name just as if I had bought a new issue CD from them?

MAKNYC | May 26, 2023 | 323 posts since 2015

txFish1 Here’s a rundown on how it works in the United States. When any security is created (bond/stock/option/brokered CD etc.) a cusip ID is assigned. That makes it an easily transferable security. Virtually 100% of all non-certificated securities are held by one entity…DTC-Depository Trust Company or Cede & Co which is related. So the issuing entity whether a bank, a corporation or the U.S. Treasury only know this one entity as the owner of these outstanding securities. (There are exceptions for securities in certificate form and possibly employees of corporations etc.). All U.S. brokerage firms maintain accounts at DTC. DTC keeps records as to which brokerage firms represent the ownership interests of the entire outstanding security population. As an example, assume a bank issues $50 million of a brokered CD. As a new issue, Schwab clients purchased $20 million, Goldman Sachs $15 million and B of A $15 million. Bank only knows DTC/Cede as the owner of $50 million. DTC/Cede know’s Schwab, Goldman & B of A. When bank makes interest or principal payments they send one payment to DTC. DTC allocates payment to accounts of Schwab (40%), Goldman 30% and B of A 30%. When the brokerages receive those credits they allocate it on their systems in accordance with their customers holdings. This is why when you get your annual tax document the issuing bank doesn’t report to the IRS that they paid you interest. Goldman reports to the IRS that they did (on the banks behalf). So as an owner you would receive your respective portion of those payments. Now let’s say you're a really rich client of Goldman and you owned $10 million of this CD (ignore the insurance issue) and you decided to sell. Goldman sells your CD and a client of Schwab buys it. What changed? Schwab clients now own $30 million ($20 million prior + your $10 million), Goldman $5 million ($15 million prior less the $10 you sold), and B of A $15 million which is unchanged. DTC/Cede just journals on their books $10 million from Goldman’s to Schwabs. Issuing bank knows nothing and doesn’t care. Any future interest/principal will be made in proportion to ownership at that point in time.

txFish1 | May 26, 2023 | 476 posts since 2023

MAKNYC Appreciate the detailed explanation and I grasp it now. I had received a few different and vague explanations from Fidelity fixed income dept. but I suspect they were CSR reps as I did not have time to wait on hold for a Fixed Income specialist.

w00d00w | May 26, 2023 | 360 posts since 2012

my approach with brokered CD is purchasing with the intent to hold to maturity. should be able to sell in the marketplace if needed, but uncertain return. this is different than direct CDs where early withdrawal cost is a known amount. also prefer to purchase brokered CD at a price less than or equal to 100. it's my understanding that if purchasing at a price above 100, the portion above 100 is not insured by FDIC. So purchase of a $1K CD at 101 results in $10 of $1000 CD being uninsured. Need to decide how meaningful that uninsured amount is to an individual's investing process. some other aspects to consider include whether CD has callable schedule (if any), interest payment schedule, and whether CD rate is fixed or changes over time.

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