Brokered CDs

[ondafringe]

I've been looking into brokered CDs through Merrill as a place to park some cash, but I'm a little confused about what protection these CDs have.

The broker indicates brokered CDs are covered by FDIC insurance. However, the broker *appears* to set these up at the issuing FDIC bank in bulk, and then partitions them out in $1k increments until the total of that bulk CD has been reached.

CDs purchased through Merrill are available only in bookentry form, evidenced by one or more master certificates issued by the depository institution, each representing a number of individual CDs. These master certificates are held by The Depository Trust Company (DTC). Merrill, as deposit broker and custodian, keeps records of your CD ownerships and provides you with account statements and written confirmations of your CD holdings and purchases.

So what does all that mean?

Is the owner of record at the issuing bank Merrill, meaning Merrill gets the FDIC coverage, not me? Granted, if Merrill is covered by FDIC, then by extension, I guess I would be covered, as well.

If I took $5k of that bulk CD, Merrill just puts me on their books as owning $5k of their bulk CD. So since this is not a Merrill-issued CD, what if Merrill goes belly-up before that CD matures, how would I be covered: FDIC, SIPC, or not at all?

 

[Robert Morse]

ondafringe - A CD is protected by FDIC up to FDIC limits. Just that simple. Changing the subject a little, if you have a brokerage account, IMO, there is an advantage to holding a T-bill over a CD or a money market fund. CDs are not marginable. You can't use their value to trade and the CD is on the banking side and protected by FDIC. There is often a penalty to sell them. If you buy a T-bill, they are marginable, can be held in your brokerage account and might provide a higher return. You can also buy a Money Market Fund. They trade at $1 so have minimal market risk. They can also be held in a SIPC protected account, are marginable after 30 days and can easily be sold. At Lightspeed, we offer access to both a Money Market Fund (Not through a sweep) and T-bills.

 

[countryBoy641]

FDIC Insurance covers $250K // $500k joint account.
And that limit applies to the CD issuer and particular issue, not the custodian (Merrill/BOA)
I've had lots of CDs at Merrill/BOA, different sizes.
It works fine.
Buy your Merrill CDs (any size up to that limit) and rest easy.

DTC is (or was) just a big warehouse in Long Island City (Queens County), NY.
Most of the paper certificates exist there.
The ownership gets "shuffled" daily.
It's is the modern day evolution of "Runners" (on Wall Street).
Young people were hired to run around the financial district, delivering stock and bond certs.
But who wants stock certs now?
Can't day trade if you don't have the certs.
The big hammer solution is Book Entry everything, trade as much as you want.
***
It was probably the IRS who set this route.
Up until a few decades ago (1986?) a person could buy a physical-form Municipal Bond (bearer form, coupons attached).
Bearer form literally meant "pay to the bearer". It was cash.
Early 1980s I was working retail. A customer walked in with $1 Million of bearer bonds.
He had them in an American Tourister suitcase.
That was $1Million cash the guy had just walked in off the street with.

The popular rumor in 1986 was that Illegal Drug money was flowing into Munis.
So the IRS clamped down. No more bearer bonds.
If there is anything nefarious about Book Entry (BE), its nothing to do with FDIC,
FDIC does not collect money. They payout money.
IRS is the reverse. They don't pay out money. They collect money.

 

[ondafringe]

Appreciate the explanations. Thanks to you both.

 

[ondafringe]

...
I've had lots of CDs at Merrill/BOA, different sizes.
It works fine.
Buy your Merrill CDs (any size up to that limit) and rest easy.
...

Since you've used Merrill: Let's say I do a $5k brokered CD, are there any fees added to that for self-directed accounts?

 

[Business2122]

I've been looking into brokered CDs through Merrill as a place to park some cash, but I'm a little confused about what protection these CDs have.

The broker indicates brokered CDs are covered by FDIC insurance. However, the broker *appears* to set these up at the issuing FDIC bank in bulk, and then partitions them out in $1k increments until the total of that bulk CD has been reached.



So what does all that mean?

Is the owner of record at the issuing bank Merrill, meaning Merrill gets the FDIC coverage, not me? Granted, if Merrill is covered by FDIC, then by extension, I guess I would be covered, as well.

If I took $5k of that bulk CD, Merrill just puts me on their books as owning $5k of their bulk CD. So since this is not a Merrill-issued CD, what if Merrill goes belly-up before that CD matures, how would I be covered: FDIC, SIPC, or not at all?

When it comes to banking and its instruments as a whole, FDIC coverage specifically just means the bank gets credit on their end matching the amount you deposited. So yes merril get money for holding yours. Theoretically the credit they get is suppose be for you when they lose. Keep in mind all these numbers is on digital time so don’t take your money being insured to heart, if the banks “goes belly up” as you put it, you’ll get your money but on their timeline, kind of like law suits, you win on paper but when you can count it is a different matter

Far as brokered CDs it works as a standard CD far as its insurance, only difference is, some institutional owners of it allow you to sell the CD before it’s maturity, but don’t guarantee it’s ROR if you do so

 

[countryBoy641]

Since you've used Merrill: Let's say I do a $5k brokered CD, are there any fees added to that for self-directed accounts?

No, no hidden fees.
And I have both a CMA, and an IRA at Merrill.
I have put CDs in both of those.
But if you try to get your money back (sell trade) before maturity, you may incur a capital loss.
Need to hold CDs to maturity.
For folks with bigger pieces ($50K, $100K) better just buy Treasury bills.
I never bought any Bills at Merrill.
But I have bought many Bills at Ameritrade.
Bills are good - spreads are tiny. (cheap to trade, if you wish)
And tax exempt state and local.

 

[ondafringe]

No, no hidden fees.
And I have both a CMA, and an IRA at Merrill.
I have put CDs in both of those.
But if you try to get your money back (sell trade) before maturity, you may incur a capital loss.
Need to hold CDs to maturity.
For folks with bigger pieces ($50K, $100K) better just buy Treasury bills.
I never bought any Bills at Merrill.
But I have bought many Bills at Ameritrade.
Bills are good - spreads are tiny. (cheap to trade, if you wish)
And tax exempt state and local.

Okay, appreciate it. You've been very helpful. Thanks, again!

 

[ondafringe]

When it comes to banking and its instruments as a whole, FDIC coverage specifically just means the bank gets credit on their end matching the amount you deposited. So yes merril get money for holding yours. Theoretically the credit they get is suppose be for you when they lose. Keep in mind all these numbers is on digital time so don’t take your money being insured to heart, if the banks “goes belly up” as you put it, you’ll get your money but on their timeline, kind of like law suits, you win on paper but when you can count it is a different matter

Far as brokered CDs it works as a standard CD far as its insurance, only difference is, some institutional owners of it allow you to sell the CD before it’s maturity, but don’t guarantee it’s ROR if you do so

Thanks for the clarification. If it happens, I'll wait it out, as long as I get my money back... eventually.

 

[ondafringe]

ondafringe - A CD is protected by FDIC up to FDIC limits. Just that simple. Changing the subject a little, if you have a brokerage account, IMO, there is an advantage to holding a T-bill over a CD or a money market fund. CDs are not marginable. You can't use their value to trade and the CD is on the banking side and protected by FDIC. There is often a penalty to sell them. If you buy a T-bill, they are marginable, can be held in your brokerage account and might provide a higher return. You can also buy a Money Market Fund. They trade at $1 so have minimal market risk. They can also be held in a SIPC protected account, are marginable after 30 days and can easily be sold. At Lightspeed, we offer access to both a Money Market Fund (Not through a sweep) and T-bills.

I won't be trading through Merrill, so not concerned about marginability. I looked at treasuries, but CDs looked better to me, at least for short terms. Thanks for the suggestions.