If you’ve just started your journey in personal finance, you’ll likely encounter the term “CDP Account” sooner or later.
Just one of the many phrases in financial jargon that may seem daunting to some of you unfamiliar with the financial industry.
But fret not, we’ve been there done that (just like Pitbull), and we’re here to explain what exactly a CDP account is.
By the end of this article, you should be equipped with all the knowledge when it comes to CDP accounts.
What is a CDP Account?
Very simply, the term “CDP” means “Central Depositary” and has 3 main roles: Being a Central Counterparty, a Securities Settlement System, and a Central Securities Depository.
CDP was established by SGX (Singapore Exchange) in 1987 and secures all your transactions of Singaporean shares.
More financial jargon, yes. But I’ll walk you through what these terms mean!
Role 1: Central Counterparty
The CDP fulfils its role as the Central Counterparty by securing all your transactions on the SGX.
It does so by acting as the buyer to each seller and the seller to each buyer – just like a middleman – eliminating buyers’ credit and sellers’ delivery risks.
You can think of the CDP as the Singapore Exchange providing insurance on all your assets traded in the Singaporean market.
The CDP as a Central Counterparty eliminates settlement uncertainty for you should you wish to buy or sell any security on the market.
Role 2: Securities Settlement System
This system ensures that your securities (stocks, ETFs, etc.) get delivered regardless of whether you are buying or selling.
You can opt to settle your trades on a Delivery Versus Payment or Free of Charge basis.
Delivery Versus Payment means that securities are only transferred when funds have been transferred.
On the other hand, Free of Charge does not require a corresponding flow of funds to transfer securities.
Role 3: Central Securities Depository
This role of the CDP means that the CDP will hold all your securities for you.
Just as a bank may hold some of your savings, all securities traded through a CDP-linked trading account will be held in the CDP.
There is an alternative to keeping your shares in the CDP, but we’ll get to that later in the article.
3 Types of CDP Accounts
There are 3 main categories of CDP accounts: Individual, Joint, and Corporate.
I’ll explain what all 3 entail, but note that most of you interested in personal finance will likely be looking to open either Individual or Joint accounts.
Firstly, we’ve got your Individual accounts.
These are your “standard” personal accounts which you open just for your personal trading of stocks and other securities.
Also, this is currently the only type of account you can open online without having to mail physical documents to SGX.
Some important things to note about Individual accounts:
- You have to be 18 and above to be eligible to open your Individual account.
- You cannot be an undischarged bankrupt.
- You can create your account via the SGX website and sign in using MyInfo (MyInfo will quickly retrieve all your personal information for you).
- You can only apply for Singapore Treasury Bills and Singapore Saving Bonds through Individual accounts.
Only you have access to this account, and you’ll need a broker (that’s a Depositary Agent) alongside your individual CDP account to trade on the Singaporean market.
While Individual accounts only give access to an individual person, Joint accounts can be held under 2 distinctive persons.
Joint accounts can be further separated into 2 subtypes: Joint-Alternate accounts and Joint-And accounts.
Opening a Joint-Alternate account means that either of the applicants can give instructions to CDP.
These instructions can consist of trading shares or withdrawing money from the CDP.
Direct Credit Servicing (DCS) is another thing to take note of when deciding what type of account to open.
Very simply, DCS allows you to directly credit your dividends or other cash distributions directly into your Singaporean bank account.
This service is currently only limited to Individual accounts and Joint-Alternate accounts.
A Joint-And account is also an account shared by 2 individuals.
However, the main difference between a Joint-And account and a Joint-Alternate account is that with a Joint-And account, both parties must jointly sign and give instructions to CDP.
This means that CDP must receive approval from both parties to execute any trading action.
Furthermore, CDP doesn’t offer DCS for Joint-And accounts.
Corporate accounts are, as the name suggests, for corporations.
These accounts are also known as Trustee accounts.
To open a corporate account, the applicant must be a duly incorporated body with limited liability.
This means that the account will not be opened under the name of an individual, but the name of a company.
This also means that any proceeds or losses will not go to any individual, but to the corporation.
CDP does not offer DCS and online applications for corporate accounts.
Advantages of a CDP Account
Having a CDP account allows you to legally own the shares that you purchase via your CDP-linked brokerage.
Legal ownership comes with a few advantages.
Firstly, you’ll be in direct contact with the companies you invest in.
This means that you’ll be personally invited to attend Annual General Meetings and will receive any shareholder notification from your invested companies.
Annual General Meetings (AGM) are important events for companies to present financial performance to shareholders.
As an invitee, you can ask the company’s leadership questions and even enjoy some free refreshments!
Secondly, you’ll be entitled to have your dividends directly credited into your specified bank account (DCS).
You can also link multiple brokerages to your CDP account.
A benefit of this is that you can take advantage of ongoing promotions that different brokerages might have for their users.
Additionally, brokerages have different advantages which you can utilise.
For instance, DBS Vickers has a wide variety of asset classes for you to access, but moomoo has better commission rates but more limited options.
By signing up for both brokerages, you can have more access to these functions at potentially lower costs.
However, it should be noted that each brokerage charges a unique commission fee which you should be aware of before signing up for a trading account with them.
If you purchase securities through your CDP-linked trading account, you will not lose your shares if your brokerage defaults.
Or even if your brokerage goes bankrupt.
Given that your shares are secured in the CDP, the brokerage does not have any ownership over your securities.
Hence, your shares will be unaffected if your brokerage faces financial difficulties or even bankruptcy.
Disadvantages of CDP Accounts
High Chargeable Fees
When you use a CDP-linked account to trade, you’ll be charged a clearing fee of 0.0325% and a 0.0075% SGX trading fee.
Additionally, the CDP charges a $75 processing fee on each failed contract and a 0.75% brokerage rate on each buy-in contract.
These pricey fees may erode any earnings you make from trading, so do ensure that you read the fine print before deciding what kind of trading account suits you the best.
This is on top of what your chosen brokerage charges, so there’s an additional layer of fee you need to consider.
Unable to Trade with Foreign Securities
The CDP is under the Singapore Exchange, so it can only secure and conduct trades with Singapore-listed securities.
If you want to trade in foreign markets such as the Nasdaq or the London Stock Exchange, you must open a custodian account with a brokerage.
However, each brokerage still only has access to a limited number of markets, so you’ll have to see which brokerage account can allow you to trade in your desired market.
But what exactly is a custodian account?
CDP Alternative: Custodian Accounts on Brokerages
If you’ve been wondering what choice you have apart from using a CDP account, here’s your direct alternative.
While a CDP-linked account holds your securities in the CDP, custodian accounts hold your securities with the brokerage you are using.
The key difference in using a custodian account is that your purchased securities aren’t under your name.
Instead, they’re held under the brokerage’s custody, meaning that you will not be the legal owner of the securities.
This means you don’t get invited to AGMs and vote for how you want the company to move forward.
I will be explaining more about this later on, so keep reading.
Why use a custodian account?
Lower Brokerage Fees
Brokers typically offer lower brokerage fees for custodian accounts than CDP-linked accounts.
Brokerages can offer lower fees because they are not bound by the high fees which CDP charges for the usage of their services.
By keeping you on their platform, you continue using a single broker for all your trading or investing needs.
This way, despite charging lower fees, they are able to “earn” more from you in the long run.
However, brokerages do charge different “hidden” fees, such as inactivity fees and maintenance fees, amongst others.
So while brokerage fees are more competitive than CDP-linked fees, do keep an eye out for charges to your trades.
Investing in Foreign Markets
If you want to diversify your portfolio beyond the Singaporean market, you must use a custodian account.
CDP only assist you in conducting trades in the Singaporean market, so you will need a brokerage to trade overseas.
As such, opening a custodian account is mandatory to diversify your portfolio into foreign markets.
Disadvantages of Custodian Accounts
Lack of Ownership of Securities
You can think of brokerages as a middleman who helps you conduct your trades and keeps your securities for you.
While not using the CDP allows brokerages to charge you lower fees, this comes with the cost of not having the securities under your name.
This has a few repercussions.
Firstly, if the brokerage you have a custodian account goes bankrupt, it may take some time for you to recover your securities.
Under the Securities and Futures (Licensing and Conduct of Business) Regulation issued by the MAS, brokerage firms must ensure they do not mix their client’s money and securities with their assets.
As such, should your brokerage become insolvent, your securities and money placed with the brokerage (or their custodian bank) are protected.
So don’t worry about the lack of ownership, as you will still get your securities back.
Secondly, you will not be notified of corporate actions such as dividend reinvestment plans or stock splits.
Thirdly, companies will not invite you to annual general meetings (AGMs).
Instead, Singapore law allows brokerages to send 2 proxies (investors) to attend the AGM on their behalf.
So you can email your brokerage for a shot at attending an AGM (though we think it’s quite unlikely).
So there you have it, your 101 guide to everything CDP-related.
Now that you’ve read this article, you might want to open your very own CDP account.
Alternatively, you can consider opting for custodian-based brokerages too!
We have a list of the best online brokers in Singapore here that you can check out.
Always know your needs and thoroughly research first before deciding which account to open.
If investing is too complicated for you, consider engaging a certified financial advisor instead to help you with your investments.
That way, you don’t risk making the wrong decisions that will impact your financial life.