Quote from G.Galilei:
- Is the money, one needs to open an account with the broker, transfered further to an clearing FCM?
best regards
Only FCM's are allowed to receive and hold client funds "in trust"... By regulation, IB's must immediately forward any checks received from the client to the FCM immediately. However, any check you write should be made out to the FCM, and NEVER to the broker. And of course, all wire transfers should be sent directly to the FCM's bank account and NEVER to the broker. If you ever find a broker instructing you to either make the check out directly to them or to send wires directly to them, you should report them to the NFA immediately, although, that would be such a huge risk for a broker to take that its extremely unlikely that an actual licensed and registered broker would actually do such a thing. This is both on the futures and on the securities side.
Quote from G.Galilei:
- Lets say, globalfutures goes bankrupt because we have an instant 400 points drop in the S&P e-mini future and the most accounts get eaten up far before they can close all positions, so the left over is all accounts with a big minus. Will i get my money back from the FCM regardless of the solvency of the account owners?
This question, IMHO, is a little more tricky, because you're no longer talking about clearing, as much as you're talking about execution. You have to remember that in the world of trading, clearing is a separate issue from execution (although most firms these days try their hardest to blur the lines). The clearing firm is more along the lines of an insurance company... their primary function is to guarantee the quality and financial integrity of one side of the trade. Historically, the primary job of the broker has been sales and customer service... market to traders and try to get them to open up accounts at the FCM, answer questions and fix problems when they arose, and collect a small commission on each trade along the way. In the old days, prior to 1994 when trading was established on Globex, and really 1998, when cable and dsl modems started making their way into homes, that was really all you needed in order to execute and clear a trade, because 8 times out of 10, your order was being phoned in to a human in the actual pit where the contract was traded. But in the world of electronic trading, traders expect more than just clearing and customer service.... we expect software so that we can execute trades ourselves from our own computers.
As of today, the role of the technology vendor as it relates to clearing will vary from FCM to FCM. Most of the larger FCM's want to be able to offer as many different trading platforms as possible, in an effort to appeal to as many different traders as possible. You'll notice that FCM's like MF Global and RCG seem to take the stance of "we're a clearing firm, not a software company" and tend to license their technology from 3rd party vendors like Trading Technologies, Patsystems, Ecco, and/or Orc. Typically, these relationships are established by the FCM, and the FCM then makes it available to the IB's to sell for them, or on their behalf (and quite often they mark it up as well).
Some FCM's, quite often the smaller non-clearing FCM's like TransAct Futures, PFG, or Trademaven, for instance, choose to develop their own technology in-house. Sometimes this is done to offset their higher cost of clearing since they have to "clear" their trades through a clearing FCM; sometimes its done so that they have an exclusive platform that they can use to try to lure in clients. Interactive Brokers, by the way, is an example of a firm that is both a clearing FCM and a clearing Broker Dealer, and have developed and own their own proprietary technology.
Now, as far as IB's go, they also seem to be falling into one of two categories: those that are essentially 3rd party marketing arms of the FCM (or multiple FCM's in the case of the IIB), and those that are essentially glorified technology providers. IIB's like Global, tend to simply re-sell the technology that is available to them via their various FCM relationships. IIB's like FuturePath/PhotonTrader, actually have developed their own technology (at least on the front-end) and market it as a benefit to trading through them.
So essentially, to answer your question of: "what happens if the IB goes out of business while I'm in the middle of a trade?" you first have to take into consideration not just how your trades are being cleared, but also, how they're being executed. If your trades are being executed by a 3rd party tech firm and its licensed to the FCM and simply re-sold via the IB, then most likely it wouldn't matter if the IB went out of business because most likely the servers are being co-located by the FCM at the exchange data center. If, however, the IB is providing proprietary technology that they developed and own, then potentially you could have problems if the IB went out of business and just shut everything down while you were in the middle of a trade... although its hard to imagine an IB doing that without any notice whatsoever... but I suppose its possible.
However, even in a worse case scenario, where you were trading on an IB's proprietary platform, and they decided to flip the switch and shut everything down in the middle of the trading day, you still should be able to call the trade desk at your FCM and put an order in over the phone to flatten you out. Whenever you open up a new account, IMHO, its very important to make sure that you have the number to the FCM's trade execution desk on speed dial, just in case you lose network connectivity in the middle of a trade and need to phone in an order. So to the extent that you can do that, you have relatively mitigated risk in the event of the IB going under.
So essentially, your question shouldn't be, "what happens if my broker goes out of business while I'm in the middle of a trade?" ...rather, it should be, "what happens if my technology vendor goes out of business while I'm in the middle of a trade?" Of course, in trading, if the answer isn't a resounding "absolutely NOTHING!" then you're going to have problems at some point.
Now, having said all that, I'm noticing that its possible that I mis-understood your second question all together (sorry). If the question was simply, "if a single trader blows up and wipes out the IB with a big loss, is my money safe?" then the answer, at least theoretically, is "yes...its safe." because the FCM is on the hook for the loss, and its their responsibility to collect it from the broker and/or the account holder (or both) depending on whoever has the deepest pockets. This is of course assuming that the loss incurred by the FCM is less than the amount of excess capital they have listed in the CFTC report you referenced in your original post. If the loss is greater than their excess capital, then the exchanges and the regulators are going to get involved.
A perfect example of this is the recent MF Global incident where a rogue trader basically lost about $150 million trading wheat. Had MF Global only had $30 million in excess capital like Advantage Futures, then yah, their could be problems. But I think MF Global has like $3 billion in excess capital (or something ridiculous like that), so $150 million loss was easily absorbed. As a matter of fact, if you turn to page 12 of April's copy of Futures Magazine, there is a section that reads: "CME Group, the designated self-regulatory organization for MF Global, pointed out the following day that MF Global continued to meet its obligations and is a clearing member in good standing." When I read that I remember thinking, "good for them"... I mean, there aren't a whole lot of firms out there (at least on the futures side) that could take a $150 million hit and proceed the very next morning with business as usual. Although I don't want to get carried away with my compliments, since its clear that the whole incident could have very easily been avoided in the first place... but thats beside the point.
