Does IB offer Letter of Credit funding?

F

FrankInLa

I have reached a total account balance as the sum of all my subaccounts that starts to make me worry about broker/concentration. I currently do not want to allocate more funds to my other existing brokers and I show no interest in opening new broker accounts.

Does anyone know whether IB offers Letter of Credit (LOC or SLC) facilities where my bank issues a letter of credit that I pass to IB? In that way all my funds are safeguarded and I am "only" exposed to my bank's/banks' credit risk. I have already spoken with my bank, HSBC, and also asked JPMorgan and both are willing to issue letters of credit for me.

What about IB's side? And yes, I will contact IB shortly myself but wanted to hear first from anyone who might already be funded this way at IB.

Thanks
 
somebody in the past had suggested something about locking the money in a some Govt Bond and then the broker gives 90% or 95% credit to use! not sure .. just a thought .. does the Bond has to be held "Outside" the broker? becasue if it is on Broker's books what happens if broker goes bust ...
 
Those are separate issues. In the case you mentioned the bond would still have to be held in the IB account hence the same credit risk remains, whether cash is held or a bond is held.

traderjo said:
somebody in the past had suggested something about locking the money in a some Govt Bond and then the broker gives 90% or 95% credit to use! not sure .. just a thought .. does the Bond has to be held "Outside" the broker? becasue if it is on Broker's books what happens if broker goes bust ...
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From https://www.finra.org/investors/alerts/if-brokerage-firm-closes-its-doors one can read:

You may wonder what would happen to your securities account if your brokerage firm closed its doors.

In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers' securities and cash segregated from their own so that, even if a firm fails, its customers' assets will be safe. Brokerage firms are also required to meet minimum net capital requirements to reduce the likelihood of insolvency, and to be members of the Securities Investor Protection Corp (SIPC), which protects customer securities accounts up to $500,000. SIPC protection comes into play in those rare cases of firm failure where customer assets are missing because of theft or fraud.
 
Pitbull talks about this problem in his book. Basically, putting his money in treasuries over the weekend supposedly saved him? I forgot the details.
 
That all sounds great on paper. But history has shown that when management goes rogue, pennies on the dollar are left of investor funds. Nobody keeps management employees from failing to segregate funds or to dip their hands into segregate client accounts in order to gamble with such funds. An employee gone rogue can bring a brokerage along with all client assets to its knees. A firm like JP Morgan, UBS, HSBC, books a 200mil loss provision and goes about doing business. Huge difference. Currently almost all my life savings are concentrated in three brokerage accounts. It does not worry me (yet) but I do start to show interest in better solutions. I do need a large portion of the funding for trading purposes due to my specific trading style, otherwise this would not be an issue.

betcashrun said:
From https://www.finra.org/investors/alerts/if-brokerage-firm-closes-its-doors one can read:

You may wonder what would happen to your securities account if your brokerage firm closed its doors.

In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers' securities and cash segregated from their own so that, even if a firm fails, its customers' assets will be safe. Brokerage firms are also required to meet minimum net capital requirements to reduce the likelihood of insolvency, and to be members of the Securities Investor Protection Corp (SIPC), which protects customer securities accounts up to $500,000. SIPC protection comes into play in those rare cases of firm failure where customer assets are missing because of theft or fraud.
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The best way to address your concern is to purchase a bond held in your name, not street name, by your broker, which is used as collateral you can trade on. When I did this with IB I think you took a 5% haircut on it, but at the time at least the interest you were getting on the bond made up for that. Since the bond is in your name, you get it back immediately if there is a bankruptcy, unlike assets held in street name which you will still most probably get back but it may take a long time. I've been doing this for several years at several different brokers including my current clearing firm, so it's definitely something they're used to and will accomodate for you.
A letter of credit from your bank doesn't really protect you and actually puts you in a worse situation. Someone has to extend funds to the broker before they can buy securities for you, in this case it's the bank. You're on the hook to repay the bank those funds. If your broker goes under, your bank is out those funds. They're going to recover them from you if they can't recover them from the broker, that's in your letter of credit agreement. And they'll work much harder to recover the funds from you then from the bankrupt broker, after all you're not bankrupt! Not a position you want to be in.
BTW, history over at least the last 75 years has shown that brokerage customers at most take a small haircut on their funds in the end. Heck, even Madoff's victims got 75% of their money back. You just may not get it back for a long time, especially what's over the SIPC limit, and it's a painful process. And of course history is full of unprecedented things. That's enough for me to accept the haircut to avoid it, but everyone's mileage may vary.
 
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SIPC inssurance = $500K, not for derivatives.
The risks are mostly with Futures & Forex, and alternative investments. (Remember MFGlobal?)
Spreading to 3 brokers is already spreading risks.
Safest: US gov treasuries when bought directly to TreasuryDirect: https://www.treasurydirect.gov/tdhome.htm
In that case, low risk = low returns. High risk = lower return.
 
Interesting idea. So you bought the bonds directly from the Treasury and then had them transferred as securities into your brokerage account? Care to enlighten me a little more about the process?

Sig said:
The best way to address your concern is to purchase a bond held in your name, not street name, by your broker, which is used as collateral you can trade on. When I did this with IB I think you took a 5% haircut on it, but at the time at least the interest you were getting on the bond made up for that. Since the bond is in your name, you get it back immediately if there is a bankruptcy, unlike assets held in street name which you will still most probably get back but it may take a long time. I've been doing this for several years at several different brokers including my current clearing firm, so it's definitely something they're used to and will accomodate for you.
A letter of credit from your bank doesn't really protect you and actually puts you in a worse situation. Someone has to extend funds to the broker before they can buy securities for you, in this case it's the bank. You're on the hook to repay the bank those funds. If your broker goes under, your bank is out those funds. They're going to recover them from you if they can't recover them from the broker, that's in your letter of credit agreement. And they'll work much harder to recover the funds from you then from the bankrupt broker, after all you're not bankrupt! Not a position you want to be in.
BTW, history over at least the last 75 years has shown that brokerage customers at most take a small haircut on their funds in the end. Heck, even Madoff's victims got 75% of their money back. You just may not get it back for a long time, especially what's over the SIPC limit, and it's a painful process. And of course history is full of unprecedented things. That's enough for me to accept the haircut to avoid it, but everyone's mileage may vary.
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