Sunday, April 26, 2009

insurance in securities markets

in the late 1960s many brokerage firms were confronted with an unexpectedly large volume of transaction and a lack of proven computerized systems able to handle the workload. This gave rise to back-office problems and resulted in a rash of " fails to deliver"- situations in which a seller is broker did not deliver certificates to a buyer is broker on or before the required settlement date.
Worse yet, several brokerage firms subsequently failed, and some of their clients discovered for the first time that certificates " in their accounts" were not necessarily physically available. Such events led to serious concern about the desirability of any procedure that kept certificates out of the hands of the investor. To avoid erosion of investor confidence, member firms of the New York Stock Exchange spent substantial sums to cover the losses of failed firms and\or to merge them into successful firms. But such remedies were only temporary ; insurance provided a more permanent solution.
The securities Investor Protection Act of 1970 established the securities Investor protection Corporation (SIPC), a quasi-governmental agency that insures the accounts of clients of all broker-dealers and members of exchange registered with the Securities and Exchange Commission against loss due to the firms‘s failure. Each account is insured up to a stated amount. The cost of the insurance is supposed to be borne by the covered brokers and dealers through premiums, but up to 1$ billion may be borrowed from the U.S. Treasury .
A number of brokerage firms have gone farther. arranging for additional coverage from private insurance companies. Many have policies that, together with SIPC coverage, insure accounts up to $500.000.

No comments: