Question on Brokered CD's - who really owns them?

[Chuckanut]

Yes, its nothing to be worried about. In fact your closer to “owning the CD”, than you are owning your stocks. As many may not even know that any stock in your brokerage account isnt even owned by yourself. Its in street name through brokerage and furthermore Cede and Co. is technically the owner of all common stocks outstanding.
Added…. Jim, I just saw your post, I’m too late, ha.

I learn something new every day. I first thought Cede and Co was a play on the name abbreviation CD we use for Certificate of Deposits. But, there really is a Cede and Co.!!!

 

[Mulligan]

I learn something new every day. I first thought Cede and Co was a play on the name abbreviation CD we use for Certificate of Deposits. But, there really is a Cede and Co.!!!

People can get a little extreme and come up with all sorts of conspiracy theories about the DTC and Cede & Co. But its interesting stuff none the less being most people arent even aware of it or the actual process. You can google it and find articles. Interesting stuff.

 

[jim584672]

Cede & Co. owns almost all stocks, bonds and CDs in the US. Yet no one has heard of it.

 

[Ready]

With a brokered CD if you want to sell prior to maturity you have interest rate risk. With a bank CD you have a pre-defined early withdrawal penalty. So when shopping you have to compare the early term penalty to the risk of the value of the CD dropping prior to maturity.

But the main reason I don't bother with brokered CDs is almost all of the CDs with competitive rates are callable, so you never really know if the CD will pay out until maturity. Banks just predetermine the length of the term and guarantee the payout until end of term.

 

[copyright1997reloaded]

With a brokered CD if you want to sell prior to maturity you have interest rate risk. With a bank CD you have a pre-defined early withdrawal penalty. So when shopping you have to compare the early term penalty to the risk of the value of the CD dropping prior to maturity.

But the main reason I don't bother with brokered CDs is almost all of the CDs with competitive rates are callable, so you never really know if the CD will pay out until maturity. Banks just predetermine the length of the term and guarantee the payout until end of term.

This was certainly not true two weeks ago, brokered CD's (non-callable) rate rates above deals being discussed on DepositAccounts.com.

These are all CD rates I picked up over the last couple/few weeks:
5.250%
5.350%
5.400%
5.100%
5.300%
5.400%
5.500%
5.000%
5.200%
5.400%
5.400%
5.050%
5.150%
4.850%
5.250%
4.900%
5.000%
5.050%
5.000%

and their maturies:
3/15/2024
3/22/2024
3/22/2024
3/28/2024
5/23/2024
6/26/2024
7/1/2024
8/1/2024
9/16/2024
9/23/2024
9/27/2024
10/7/2024
11/18/2024
12/6/2024
3/17/2025
12/8/2025
3/30/2026
3/2/2027
3/21/2028

NONE of these are callable.

 

[Sirka]

This person answered the crux of my questions of explaining the process. Thanks everyone for trying to help.

Just want to clarify for anyone who is frustrated by my questions - I'm just trying to learn something most people (beyond this thread) have not been able to answer for me. I'm not on the edge of any stressful financial decisions. I always think it's ideal to understand something, especially in the realm of investing. And I actually find bonds and CD's way more complex than stocks - especially when there are more than one institution involved (such as brokers). I've bought these things directly from the issuers in the past, but not brokers. That's why I ask.

I just started investing in T-bills and Brokerd CDs. I learned by watching YouTube videos: https://youtu.be/zhEiyW2N7KE

 

[Car-Guy]

But the main reason I don't bother with brokered CDs is almost all of the CDs with competitive rates are callable, so you never really know if the CD will pay out until maturity. Banks just predetermine the length of the term and guarantee the payout until end of term.

I have 21 CD's "at this time" and none are callable. Almost half of them are paying 5% and a couple are at 5.4%. Just curious, what do you consider competitive rates?.

 

[pb4uski]

.... But the main reason I don't bother with brokered CDs is almost all of the CDs with competitive rates are callable, so you never really know if the CD will pay out until maturity. Banks just predetermine the length of the term and guarantee the payout until end of term.

I was looking at some this morning. Callable was 5.1% and non-callable was 4.9%... how lucky do you feel?

 

[disneysteve]

With a brokered CD if you want to sell prior to maturity you have interest rate risk. With a bank CD you have a pre-defined early withdrawal penalty. So when shopping you have to compare the early term penalty to the risk of the value of the CD dropping prior to maturity.

That's true, but if I ever need to get out of a CD early, that will mean we are in extremely dire straits and it won't matter. We have laddered fixed income holdings with something maturing at least every 3 months. If we have to cash out in less time than that, something catastrophic will have happened.

But the main reason I don't bother with brokered CDs is almost all of the CDs with competitive rates are callable, so you never really know if the CD will pay out until maturity.

As others have already said, this simply isn't true. We've got brokered CDs for us and I manage my mother's account and we have many paying between 4.75 and 5.35% at this point going out as far as 9/2026. None are callable.

 

[clifp]

No, it’s covered by FDIC insurance, not SIPC. The CD is still on deposit at the issuing bank. Your brokerage holdings, the individual securities, are not insured by SIPC. SIPC insurance coverage is for when a brokerage fails/goes bankrupt or some securities go missing from your account.

If I have more than 250K in brokered CDs at Schwab, I'm still fully protected by FDIC, as long as no individual bank has more than $250K worth of CDs?

 

[pb4uski]

If I have more than 250K in brokered CDs at Schwab, I'm still fully protected by FDIC, as long as no individual bank has more than $250K worth of CDs?

Yes, and to be clear I think the $250k includes interest.

 

[audreyh1]

I bought 2 brokered CDs with pretty sweet rates, and neither were callable. Granted they were fairly short term, but I didn’t notice any other callable CDs for the same duration either.

 

[Chuckanut]

I was looking at some this morning. Callable was 5.1% and non-callable was 4.9%... how lucky do you feel?

Personally, not lucky enough to jump at a 0.2% spread to get the callable CDs. Maybe I'm too conservative but that risk/reward ratio seems very low. My 2¢. YMMV.

 

[Ready]

This was certainly not true two weeks ago, brokered CD's (non-callable) rate rates above deals being discussed on DepositAccounts.com.

These are all CD rates I picked up over the last couple/few weeks:
5.250%
5.350%
5.400%
5.100%
5.300%
5.400%
5.500%
5.000%
5.200%
5.400%
5.400%
5.050%
5.150%
4.850%
5.250%
4.900%
5.000%
5.050%
5.000%

and their maturies:
3/15/2024
3/22/2024
3/22/2024
3/28/2024
5/23/2024
6/26/2024
7/1/2024
8/1/2024
9/16/2024
9/23/2024
9/27/2024
10/7/2024
11/18/2024
12/6/2024
3/17/2025
12/8/2025
3/30/2026
3/2/2027
3/21/2028

NONE of these are callable.

I just checked with Vanguard and the highest rate I could find on a non-callable CD was 4.95%. My Utah First Bank CD pays 5%. Now of course the small difference isn’t worth chasing, but I’m not seeing anything in the 5.5% range. What brokerage are you using to get these?

 

[disneysteve]

I just checked with Vanguard and the highest rate I could find on a non-callable CD was 4.95%. My Utah First Bank CD pays 5%. Now of course the small difference isn’t worth chasing, but I’m not seeing anything in the 5.5% range. What brokerage are you using to get these?

Rates fluctuate a lot, and they tend to be higher earlier in the day. I looked at some this morning and right now, the ones listed are 0.4% lower than they were then. Also, rates have come down some over the past couple of weeks. I got one for 5.35% on March 16 that matures 9/2024.

 

[Ready]

Rates fluctuate a lot, and they tend to be higher earlier in the day. I looked at some this morning and right now, the ones listed are 0.4% lower than they were then. Also, rates have come down some over the past couple of weeks. I got one for 5.35% on March 16 that matures 9/2024.

I haven’t been following it closely lately, but in the past I’ve just never found rates as good as bank CDs. It sounds like I would need to monitor the available CDs frequently and then jump in when a good one shows up. I’m not opposed to doing that. Just haven’t had much luck with it.

If I can find a bank paying 5% and only charging 6 months interest for an early term penalty I still prefer it. That way I’m locked in for 5% for the entire term, but if rates go up a lot I’m locked in at only a 6 month penalty to pull out and reinvest at the higher rate.

 

[pb4uski]

Good link for the worry warts out there.

https://thefinancebuff.com/brokerage-account-safe-no-fdic.html

When you have money at a broker, the broker is only buying and keeping things for you. They do have it in a safe so-to-speak. Your money is in stocks, bonds, mutual funds, ETFs, etc. There is an exact mapping between what the broker says you have in your account and what the broker keeps for you. The broker doesn’t invest your money in long-term bonds for itself.

 

[arcyallen]

Ok I know this forum tends to slip up and be snarky- but be nice...

I think it's sad that you joined the forum in just the last few months and have already been exposed to this. The majority of the posts aren't snarky, but that loud minority still persist. Good people and content gets turned away by snarky people. I'm glad you posted your question despite this!

 

[copyright1997reloaded]

I just checked with Vanguard and the highest rate I could find on a non-callable CD was 4.95%. My Utah First Bank CD pays 5%. Now of course the small difference isn’t worth chasing, but I’m not seeing anything in the 5.5% range. What brokerage are you using to get these?

These were purchased at Fidelity, Schwab, and Ameritrade.

None of the CD's I purchased are now available, and yes rates have moved down.

"The early bird gets the worm". Having said that, one of my favorites is "The second mouse gets the cheese".

 

[pb4uski]

Schwab is still showing a 5.1% 1-year CD. Callable quarterly beginning 7/12/23... but what is the likelihood of a 1-year CD getting called? I dunno. Get'em while they are hot!

Non-callable from a different bank is 4.9% I'm tapped out for now so it doesn't matter to me.

 

[Car-Guy]

^^^^^
One more week and I'll be ready to buy some more. Hope they hold until then.

 

[engineernerd]

When I buy a brokered CD from Vanguard, my understanding is that a bank sold Vanguard a bunch of their CDs as a package, and VG is distributing them out for us to buy.

But once VG sells us an individual CD from a bank, why isn’t our primary relationship with the bank, and not Vanguard ?

Vanguard has a decent explanation on their website:
https://personal.vanguard.com/us/content/Funds/FundsCertOfDepositOVContent.jsp



The brokered CDs are created specifically for the brokerages and have different rules than the ones sold directly to the public by the bank. One difference seems to be that your interest payments go into your cash sweep account and do not increase your interest-earning balance in the CD. This alone makes the product a "captive" product of the brokerage.


The FDIC apparently has decided to cover brokered CDs on similar terms to other CDs, so as far as I can tell it is still up to you to make sure all your balances at any given bank (including your brokered CDs as well as your regular CDs, savings accounts, etc.) don't exceed the FDIC limits.


The SIPC considers brokered CDs to be "securities" so they are subject to the $500k limit rather than the $250k limit that applies to cash.


It makes sense that brokered CDs would be covered by both FDIC and SIPC because they come with risks associated with both the issuing bank and the managing/operating brokerage firm. If your money goes poof because the bank fails, then FDIC steps in. If your money goes poof because Vanguard fails (or absconds with your money), then SIPC has to step in.