NeMa Americas: Weighing the Omnibus and Segregated Account Models

At the NeMa Americas conference in Miami, attendees continued to discuss changes in both the network manger’s job and in market initiatives affecting account structure.

In choosing between using an omnibus or segregated account structure, the consensus seemed to be that from a cost and efficiency perspective, omnibus is the preferred model. But as clients demand more assurance post-crisis and following events such the Madoff scandal, the segregated model has gained popularity.

As one network manager pointed out, in a dematerialized omnibus environment it can be difficult point to exactly where the assets are actually owned, whereas with the fully segregated structure going all the way to the depository, you can see that ownership chain.

Account structure is often dependent though on the market conditions.

For example, said one network manager, “In Shanghai-Hong Kong Connect, there’s a disconnect because the Hong Kong market is an omnibus market and the Chinese market is a beneficial owner market. And so they’ve set up a structure that doesn’t necessarily clearly show who has beneficial ownership of the shares. So I think that’s a big concern for all asset managers who are planning to enter into that program, which I think is one of the reasons it’s been postponed, because long-only managers are uncomfortable with the structure in place.”

Elsewhere, changes such as tax reform in Mexico, which includes the need to withhold capital gains tax for foreign investors, is causing network managers to re-examine account structure, with one network manager noting that while the organization currently uses an omnibus model, “the new tax law will lead us to offer a segregated account in order to facilitate the tax processing.”

“It’s really the markets and regulations driving whether we can set up an omnibus or segregated in the first place, so we’re usually following usually what the markets allow,” says the manager.

Other markets, such as Argentina, have some uncertainty around account structure, because even in a segregated account, the way the assets are registered, the global custodian has full ownership. So if global custodian goes insolvent, the assets could be frozen until liquidation.

Overall, says one buy-side network manager, since the crisis, firms have changed how they look at account safety, requiring more monitoring of depositories and custodians, and in some cases, adding an additional global custodian in order to mitigate risk concentration.