Shares, cash and erroneously used terms regarding broker bankruptcies

Hello dear community,

I just saw a post in my feed about deposit insurance. Of course, in the comments there was also talk about the term Special assets. Since this term is very often used erroneously and especially newcomers also like to deal with the matter of the deposit insurance
I would like to clear up here briefly and hopefully for everyone understandably with it.

Shares and the special assets

It may come as a surprise to many, but: The stocks in your securities accounts are not special assets and they never were.

Special assets is a term from the German Investment Code (Kapitalanlagegesetzbuch, KAGB), which is legally defined in Section 1 (10) KAGB:

"Special assets are domestic investment funds in contractual form that are managed by a management company for the account of the investors in accordance with this law and the investment conditions according to which the legal relationship of the management company to the investors is determined."

Pursuant to Section 1 (1) KAGB, this Act applies to investment and capital management companies. Banks that merely manage the securities accounts for their customers do not belong not to this.

If anyone is worried, I can reassure them. Even if your shares are not special assets, they still do not belong to the not to the insolvency estate, should your broker go bankrupt.

According to the EU Regulation 2019/2033 - supplemented by C(2021)6807 - it is a regulatory requirement in the whole EU that banks have so-called segregated accounts must keep. In this regulation, segregated accounts are defined in Art. 4(1) No. 49:

"For the purposes of this Regulation, 'segregated accounts' means [...] accounts with entities in which client funds held by an investment firm [...] are deposited and for which the applicable national law provides that the client funds cannot be used to satisfy claims against the investment firm in the event of the insolvency or commencement of liquidation or receivership of the investment firm [...]."

This means nothing else than that banks must strictly separate their own assets and those of their clients. Without this separation, you do not get permission to do business.

Deposit insurance topic

As was correctly stated in the comments in the community post above, stocks of course have nothing to do with deposit insurance. Shares are not Adeposits but Aninvestments!

Deposit protection is governed by the German Deposit Protection Act (Einlagensicherungsgesetz - EinSiG) and applies to bank deposits, including time deposits and savings deposits, in accordance with Section 2 (3) of the EinSiG.

Pursuant to § 8 (1) EinSiG, the legally obligatory amount of coverage is 100,000 euros.

Pursuant to § 10 (1) EinSiG, the banks' deposit guarantee scheme takes effect if BaFin determines that:

"a credit institution is for the time being unable, for reasons directly related to its financial situation, to repay deposits due and there is currently no prospect that the credit institution will be able to do so in the future."

If your bank is insolvent, your cash deposits are obviously not part of the insolvency estate either. However, if you have parked more cash in an account than is secured, it is possible that you will never see the cash deposits in excess of €100,000 (can be more, depending on the additional facility!) again. Therefore, if you have cash in the six-digit range, it would make sense to distribute this cash among different banks.

The investor compensation

Finally, I would like to make a short excursion to the less known investor compensation make.

In the "worst" case scenario, people mix up the special assetsthe deposit insurance and the Investor compensation.

When the investor compensation is defined in the German Investor Compensation Act (AnlEntG).

§ Section 1 (4) AnlEntG states:

"A compensation case [...] occurs if the Federal Financial Supervisory Authority [...] determines that an institution is unable to meet liabilities arising from securities transactions for reasons directly related to its financial situation and there is no prospect of subsequent settlement."

Anyone who has been paying close attention will notice: it says exactly the same thing here as it does for deposit insurance.

What liabilities from securities transactions are defined in Section 1 (3) AnlEntG:

"Liabilities arising from securities transactions [...] are the obligations of an institution to repay funds which are owed to or belong to investors arising from securities transactions and which are held for their account in connection with securities transactions. This includes claims by investors for the surrender of instruments owned by them and held or held in custody for their account in connection with securities transactions."

The amount of investor compensation is significantly lower than for deposit insurance. According to § 4 para. 2 AnlEntG, the compensation amounts to 90% of a loss, but not more than 20,000 euros!

So what happens if my custodian bank goes bankrupt?

You might think it's a quibble, but there is a serious legal difference between ownership and possession.

You are the owners of your shares, but not the owners.

It should be noted here that even your bank not the owner of your shares. The owner of your shares is the depository where the shares are deposited.

As the owner, you have a claim for restitution against the owner pursuant to Section 985 of the German Civil Code (BGB). If everything runs normally, you assert your ownership claim to the shares against your broker and he forwards this to the depository.

In the event of insolvency, this is generally no longer possible. You will then have to contact the insolvency administrator, who will have to arrange for you to transfer your shares to another custodian.

If it is not (or no longer) possible to return the shares for whatever reason, investor compensation will apply.

Disclaimer: This post was of course not legal advice and since this is legally an incredibly complex matter, we could of course only scratch the surface here. Therefore, no claim to completeness and accuracy.

In addition, here are a few useful links:

BaFin - Sicherungssysteme für Kunden

KAGB - Kapitalanlagegesetzbuch (gesetze-im-internet.de)

EUR-Lex - 32019R2033 - EN - EUR-Lex (europa.eu)

EinSiG - Einlagensicherungsgesetz (gesetze-im-internet.de)

AnlEntG - Anlegerentschädigungsgesetz (gesetze-im-internet.de)