In the complex world of finance, the safety and security of your investments are paramount. This is especially true in the case of a bank's bankruptcy, where the lines between a bank's assets and those of its clients can become blurred. To address this issue, new regulations have been introduced in Switzerland, specifically targeting the custody business. These regulations, which came into effect last year, on January 1, 2023, seek to enhance investor protection and align Swiss law with international standards. So, what are these new regulations all about, how do they affect you as an investor, and how do they defer from the U.S. regulation? Let's break it down.

What are the Protections in Place

In the highly unlikely event of a Swiss bank's bankruptcy, the safety and security of your money are a top priority. Swiss banks are required to have safeguards in place to protect your assets, even in such rare circumstances. Switzerland has a robust deposit insurance system that covers up to CHF 100,000 in cash per depositor per bank. Additionally, the updated regulations outlined more below, ensure that your assets (like stocks, bonds, or physical precious metals) are segregated from the bank's own assets, making it easier to return them to you quickly and efficiently.

Switzerland has a well-regulated banking sector with a strong financial system. The Swiss government and regulatory authorities have measures in place to protect depositors and maintain the stability of the financial system at all times.

At WHVP, we hold ourselves to the highest standards when selecting custodian banks to work with. We carefully consider a range of factors to ensure we partner with institutions that align with our values and meet our clients' needs. We prioritize family-owned and managed banks, as they often share our long-term perspective and commitment to stability. Additionally, we seek out banks with a low-risk business model and a deep understanding of the U.S. business environment. Finally, we look for banks that share our business philosophy, placing a strong emphasis on transparency, integrity, and client-focused service. By carefully vetting our custodian bank partners, we can provide our clients with peace of mind knowing their assets are in trusted hands.

Understanding the Changes

On January 1, 2023, several new banking regulations came into effect, including provisions for faster payouts of privileged deposits in the event of a bank's bankruptcy. Unlike deposits, securities held at the bank (known as portfolio assets) are segregated in bankruptcy, meaning they are not included in the bankruptcy estate from the outset. However, to enforce this legal right in a specific case, client holdings must be identifiable as quickly as possible. Previously, the segregation of securities was only partially implemented under the previous law. For example, when holding securities as book-entry securities, a separation of proprietary and client holdings was not guaranteed throughout the entire custody chain. As part of the adjustments to banking insolvency and deposit insurance as of January 1, 2023, this has now been changed, further strengthening investor protection.

Segregation of Assets: The crux of these new regulations revolves around the segregation of assets. In simple terms, this means that your investments, such as stocks and mutual funds, are kept separate from the bank's own assets. This separation ensures that, in the unlikely event of a bank's insolvency, your assets are easily identifiable and can be returned to you without delay.

Chain of Custody: One of the key changes is that the segregation of assets must now be maintained throughout the entire chain of custody. Previously, this separation was primarily enforced at the top level, but now it extends to all levels, including any custodians abroad.

Omnibus Account Separation: This is a fancy term for ensuring that your assets are kept separate from those of other customers. Essentially, it means that your assets are not pooled with other investors' assets, making it easier to identify and return them to you if needed.

Improved Disclosure: The new regulations also require banks to provide standardized information about these protective measures to investors. This ensures transparency and helps investors make informed decisions.

Differences to the U.S. Regulation

The custody protection in Switzerland, as described in the paragraph above, is somewhat similar to the protection offered in the United States, but there are some key differences.

The Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC) are two independent agencies in the United States that provide protections for investors and consumers. The FDIC insures deposits at banks and savings associations, protecting depositors against the loss of their insured deposits in the event of a bank failure. Currently, the FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category. FDIC insurance covers checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs). The SIPC protects investors from losses due to the failure of a brokerage firm. SIPC provides up to $500,000 in protection for each customer's securities, including up to $250,000 in cash, in the event of a brokerage firm's insolvency. This protection applies to the custody and safekeeping of securities such as stocks and bonds, but it does not cover losses due to investment fraud or market fluctuations.

In the United States, unlike in Switzerland, securities held by an investor at a bank or brokerage firm are typically not segregated from the firm's balance sheet. This means that in the event of the firm's insolvency or bankruptcy, the investor's securities could potentially be included in the firm's assets and used to pay off creditors, rather than being returned to the investor. In contrast, in Switzerland, all securities held at the bank are segregated and not included in the bank's balance sheet. This means that in the event of the bank's bankruptcy, the investor's securities are not considered part of the bankruptcy estate and are therefore returned in full to the investor. Therefore, for a portfolio exceeding $500,000, an investor may be better protected in Switzerland, where securities are segregated and not included in the bank's balance sheet, and where there is an additional layer of deposit insurance protection.

The Impact on Investors

For investors, these changes bring peace of mind. Knowing that your assets are segregated and protected, regardless of where they are held in Switzerland, is a significant step forward in safeguarding your investments. It means that in the event of a bank's bankruptcy, you can expect a smoother and more efficient process for the return of your assets.These new regulations are not just about protecting individual investors; they also reflect a broader trend towards strengthening investor protection globally. By aligning Swiss law with international standards, Switzerland is positioning itself as a leader in investor protection.

As an investor, you don't need to take any specific action. The onus is on the banks to ensure compliance with these regulations. However, it's always a good idea to stay informed about changes in financial regulations and understand how they may impact you.

In conclusion, the new regulations for Swiss banks represent a positive step towards greater investor protection. By ensuring the segregation of assets and extending this protection throughout the entire chain of custody, Switzerland is setting a high standard for safeguarding investors' interests.

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