Over the past three years Degiro has been rolling out across the European market, offering significantly lower costs than traditional brokers and promoting its safety via its asset segregation structure. Here is my overview of Degiro.
Is it legit?
I contacted the AFM (Dutch Financial Regulator) to find out about the brokers credibility. The AFM has confirmed that they are supervising the entity and that they are registered through them as an investment firm and a financial advisor. A scan of the registry , shows they are authorised to receive and transmit orders, provide investment services and execute orders on behalf of clients.
Investment firms authorised by the AFM also fall under the ICS (Dutch Investor Compensation Scheme, guaranteeing up to €20000). The AFM told me that it carries out supervision on all entities regulated by it, and in the case of breaches they will issue public warnings and revoke licenses of financial institutions. For what that’s worth.
However Degiro claims its users won’t need to utilise the ICS due to its asset segregation structure. So how does that work?
Asset Segregation Structure
“2.2 Beleggersgiro DEGIRO uses Beleggersgiro to hold Financial Instruments other than Units for Client. Beleggersgiro is a passive entity (a foundation) that does nothing else but holding Financial Instruments and money. In this way, the positions in Financial Instruments and money are separated from the capital of DEGIRO and remain available for the customers of DEGIRO, even after insolvency of DEGIRO” – From Degiro’s terms and conditions
Custody versus Non-Custody accounts
Essentially Beleggersgiro Long Short is the trust that non-custody account assets are placed in and Beleggersgiro Long Only is where custody account assets are placed in – this concerns the right of use of third parties, which are essentially prime brokers which deal with Degiro. Basically if you have a non-custody account your assets are lent out to third parties and if you have a custody account third parties have no right of use over your assets. The terms and conditions break it down as such:
4.5 Use by third parties Insofar as third parties, such as clearing members and prime brokers, where DEGIRO and Beleggersgiro Long Short hold positions in money and Financial Instruments on behalf of Client require a security right or right of use with respect to these Financial Instruments, Client hereby gives DEGIRO the explicit approval to grant this right to these third parties. A right of use of the third parties concerned means that at the level of that third party, there is no segregation of assets. As a result, damage can be caused in case of bankruptcy of the third party concerned. DEGIRO makes sure that this risk is limited by carefully selecting and monitoring the third parties it involves, by distributing positions over several third parties and by requiring security or judicial protection, such as the right of close out netting. All positions in Financial Instruments that are – at any given moment – in use by a third party, will be allocated by DEGIRO in the administration of DEGIRO or Beleggersgiro Long Short, pro rata to their holdings to the customers for whose account DEGIRO or Beleggersgiro Long Short holds the respective Financial Instruments on the respective account with that third party. In relation to Securities that are held by Beleggersgiro Long Only, no right of use will be granted. – From Degiro’s terms and conditions
The broker has come under fire online by accusations of routing option orders directly to HIQ (a hedge fund connected to Degiro) rather than directing orders to central clearing.
The company issued a statement in response to this allegation here:
Essentially Degiro is saying that it provides its clients with best execution whether via in house matching or through primary exchanges. They also claim 90% of transactions on Degiro are carried out on primary exchanges
This isn’t really an issue for people trading shares through the platform but more a point of interest for options traders, who may not like the idea of their broker’s hedge fund friend taking a position against them (if the allegations above are true). Keep in mind the AFM (dutch regulator) is fully aware of this activity and sees no issues here, also Degiro claim that their execution policy is fully in line with MFID 2017 (new European regulations). They also reiterate that order flows are confidential etc.
Overall what Degiro appears to be doing is offering institutional investor fees to retail investors. The only catch will be in order for this business model to work they’ll need to achieve volume, which explains their Europe wide roll out and international ambitions.