The level of client segregation all starts with the legal requirement to distinguish the assets and positions of CSD members from the assets and positions held for the account of their clients.
Levels of segregation
There are three main degrees of segregation at CSD level:
- Level 1: Omnibus client segregation
- Level 2: Individual client segregation
- Level 3: End-investor segregation
The levels of segregation are defined in article 38 of the CSDR.
In all levels of segregation, the members own securities are held in separate accounts and not mixed with the (end) client’s positions.
A CSD member shall offer to its clients at the least the choice between ‘omnibus client segregation’ and ‘individual client segregation’ and inform them of the costs and risks associated with each option.
Omnibus client segregation
Omnibus client segregation covers the case where a participant uses separate accounts for holding its own securities and for holding securities on behalf of its clients. The participant holds securities that belong to different clients in one securities account.
Individual client segregation
If a participant offers individual client segregation, the participant maintains separate accounts at the CSD for separate clients. An account is individual segregated if it is set up for one of the participant’s clients only. The client may be end-investor, or may be an intermediary holding securities on behalf of other investors.
End-investor segregation involves the highest degree of segregation. It requires the opening of a separate securities account for each end-investor, including retail investors.
Member XYZ has 4 clients.
- 3 clients hold 100 shares each of company A.
- 1 client is an intermediary representing the interests of 3 retail investors.
- Each retail investor hold 100 shares of company A.
Omnibus Client Segregation
Member XYZ has 1 account with a total of 600 shares of company A. The end clients are not known by the CSD.
Individual Client Segregation
Member XYZ has 4 (sub)accounts, one for each client.
3 of these accounts hold 100 shares of company A.
The account of the 4th client, the intermediary, holds 300 shares of company A.
Member XYZ has 6 accounts with 100 shares of company each. The end clients are registered and may be known by the CSD.