Banks & Clearing Firms

| March 21, 2023

A clearing firm, such as Pershing, is different from a bank in very important ways. Banks refer to their depositors as customers. In most ways, they are not. Customers are people who pay a person or a firm. Bank depositors are unsecured creditors of the bank. When you make a deposit, your money becomes part of the general funds of the bank and available to other creditors during bankruptcy. Depositors are listed as liabilities on the financial statements of banks. That is why we have deposit insurance, to protect small depositors (creditors) of banks.

Because banks comingle depositors’ assets, they are inherently dangerous. Depositors can pull their funds at any time, which has caused the runs that have destroyed banks since the founding of our country. It is only FDIC insurance that makes banks safe for depositors of less than $250,000.

Pershing is a clearing firm. They make transactions for customers. Your securities at Pershing are not part of the general assets of Pershing. Unlike banks, your brokerage account is required to be kept separate from firm assets under SEC Rule 15c3-3. Should you make a deposit of cash that does not get invested in securities, Pershing is a member of SIPC. The SIPC was created by the Securities Investor Protection Act of 1970. If Pershing somehow misplaced your securities, SIPC provides $500,000 in total coverage per customer. If there is uninvested cash in a client’s account, something that is very rare, SIPC provides $250,000 in coverage.

In addition to SIPC protection, Pershing provides coverage in excess of SIPC limits from certain underwriters in Lloyd’s insurance market and other commercial insurers. The excess of SIPC coverage is valid through February 10, 2024, for Pershing LLC accounts. It provides the following protection.

  • An aggregate loss limit of $1 billion for eligible securities—over all client accounts
  • A per-client loss limit of $1.9 million for cash awaiting reinvestment—within the aggregate loss limit of $1 billion
  • Insurance does not protect against clients making an investment that loses value.

The people in charge of the large companies that kept cash in excess of FDIC coverage were fools. They should have put their excess funds in companies like Pershing, diversifying ready funds in T-bills, commercial paper, and other assets that are readily turned into cash. This is what most big companies do and have always done, at least during my lifetime. As always, innocent people will suffer because of the actions of the foolish and the reckless.

All of you, our customers and not our creditors, should congratulate yourselves for being more prudent than executives at tech companies and the like. Since my explanation is necessarily brief, we are happy to send a copy of the four-page Understanding the Protection of Client Assets to anyone who would like one. Let us know.