The Singapore Exchange’s (SGX) proposal to expand the use of broker custody accounts marks one of the most significant structural shifts in the local equities market in decades. If implemented, it would give investors the option of holding their Singapore-listed company shares in broker custody accounts structured on an omnibus basis, instead of maintaining direct accounts with the Central Depository (CDP) or holding shares in broker custody accounts segregated by investor.
Importantly, the reform does not abolish direct accounts as investors will still be able to hold their shares directly in their own names, or in segregated broker custody accounts if they wish. Rather, SGX’s proposal introduces greater flexibility and brings Singapore more closely into line with international market practice, where omnibus broker custody accounts are the norm.
But while the shift to what is essentially a decentralised custody model may be logical from a market development perspective, its success will depend on a crucial factor: whether investors fully understand the implications of the choice they are being asked to make.
Singapore’s equities market is somewhat unique in that retail investors have for almost 40 years enjoyed the ability to hold shares directly through CDP.
This system gives investors a high degree of transparency and control because shares are registered with CDP in the investors’ own names, which means they are considered members of the issuers. The investors are able to exercise shareholder rights, such as voting at annual general meetings (AGMs) and extraordinary general meetings (EGMs), directly.
In contrast, broker custody accounts operate under a nominee or omnibus structure, where securities are held by the broker or custodian on behalf of clients. Investors remain the beneficial owners of the shares, but the shares are registered with CDP in the broker’s or custodian’s name. Accordingly, the investor has to exercise shareholder rights through the broker or custodian.
Although this might sound confusing, globally, this is standard practice. In markets such as the United States, Britain and Hong Kong, most investors hold shares through intermediaries rather than directly.
Such arrangements allow brokers to offer a wide range of services to their clients, including targeted research, consolidated portfolio management, access to multiple markets, margin facilities and newer innovations such as fractional share trading.
For Singapore, aligning with these global practices could enhance the competitiveness of its market infrastructure.
SGX’s January press statement said: “Introducing an omnibus broker custody model could also encourage greater participation by internationally active asset managers and enhance Singapore’s competitiveness as a trading and investment hub. These asset managers are accustomed to omnibus structures in other major markets, but must currently maintain a separate system to accommodate individually segregated accounts when operating in Singapore. Aligning with the omnibus approach will make it easier for them to enter and participate more actively in Singapore’s stock market.”
A decentralised system may also simplify the investing experience for some investors. Instead of maintaining separate accounts for Singapore and overseas securities, investors could hold multiple asset classes within a single brokerage account. This is not possible if an investor holds his Singapore-listed equities in a direct account with CDP.
This integrated structure could make it easier for brokers to provide digital wealth platforms, automated portfolio tools, more products and other services increasingly expected by modern investors.
However, the advantages should not obscure the trade-offs involved.
One important distinction concerns shareholder engagement. Investors who hold shares directly with CDP receive company announcements, circulars and meeting notices directly from issuers. They can attend AGMs in their own names and vote without intermediaries.
When shares are held through an intermediary, these processes may require additional steps. Voting instructions will have to be transmitted through the broker, and attendance at shareholder meetings may require prior arrangements with the custodian. In this regard, the brokers must play an active role in ensuring that investors who have preferred broker custody accounts receive the notices to attend company meetings.
In connection with the proposed rule amendments to facilitate broader use of broker custody accounts, Parliament should also make the corresponding legislative amendments to the Companies Act in the light of the 2023 High Court judgment, Tanoto Sau Ian v USP Group Ltd. The High Court ruled that only shareholders who hold shares directly in their CDP accounts or in script forms are permitted to requisition EGMs. The right to requisition EGMs is a fundamental right of shareholders when boards are not performing, or when there is any dissatisfaction with the conduct of errant directors.
There is also the matter of investor perception. Since 1987, when CDP was introduced, a majority of Singapore investors have held shares in their own names within CDP’s centralised system.
Moving to a predominantly nominee-based structure may raise questions about asset protection, operational risks or the treatment of client assets should a broker encounter financial difficulties.
However, it’s worth pointing out that these concerns are not unique to Singapore. Globally, regulatory frameworks already impose strict segregation and safeguarding requirements for client assets held by brokers and custodians.
Singapore’s regulatory regime is similarly robust, and the January consultation paper contains proposals to strengthen these regulations, as well as to enhance regulatory oversight.
Nevertheless, clear communication will be essential to ensure investors understand how their assets are protected. This is where brokers have to play their part in communicating all aspects pertaining to broker custody accounts to their clients.
After all, structural reforms in market infrastructure cannot succeed if investors do not understand them. In the case of broker custody accounts, the differences between being a deemed member and an indirect shareholder, the processes for exercising indirect shareholder rights and the protections surrounding client assets must be clearly explained.
Investors should be able to make an informed choice between maintaining a direct account or moving to a broker custody arrangement, based on their own investing style and priorities.
This is an important juncture on the road towards modernising Singapore’s post-trade custody infrastructure. The Securities Investors Association (Singapore) therefore encourages brokers and SGX to work together on improving shareholder engagement and investor services as part of this journey.
Investors, meanwhile, should educate themselves about this change and understand how the different arrangements work. This evolution in custody model can support a stronger and more vibrant future for Singapore’s stock market and benefit investors.
What matters most is that investors make a choice that best serves their own long-term interest. Ultimately, the choice is theirs.
The writer is president and chief executive of the Securities Investors Association (Singapore).
