How safe am I at IB?

[OldTrader]

Quote from nravo:

So, at a non-futures broker, your futures and FOs are not covered but your cash is, and at a futures broker your cash isn't but your futures and FOs are.

I can't believe this is true, but it is so screwed up it must be.

No, you didn't read my post. Let's try this again.

No futures brokers insure their accounts. There is no equivalent of FDIC or SIPC at a futures broker. So, your futures are not covered, your futures options are not covered, your cash is not covered.

One of the benefits of IB is that they have a Universal Account. The Universal Account is covered by SIPC and by a policy with Lloyds. SIPC covers you to $500K, including cash up to $100K. Lloyds kicks in beyond there which you can read about on their website.

However, the moment you trade futures, or futures options at IB, this is done in a futures account. These positions are not insured, and the margin related to them are not insured. Meanwhile, if you have excess cash this remains in the SIPC insured account, as does any other positions that are securities, like stocks or stock options.

Futures positions at IB and at other futures brokers are held in segregated accounts. But there are uninsured.

OldTrader

 

[nravo]

Quote from OldTrader:

No, you didn't read my post. Let's try this again.

No futures brokers insure their accounts. There is no equivalent of FDIC or SIPC at a futures broker. So, your futures are not covered, your futures options are not covered, your cash is not covered.

But the accounts are segregated, right, a la the Refco debacle? (Oh, I see your last graph.) As long as everything in my hypothetical account (see OP), including cash, is segregated, I'm fine then, I guess, right?

One of the benefits of IB is that they have a Universal Account. The Universal Account is covered by SIPC and by a policy with Lloyds. SIPC covers you to $500K, including cash up to $100K. Lloyds kicks in beyond there which you can read about on their website.

However, the moment you trade futures, or futures options at IB, this is done in a futures account. These positions are not insured, and the margin related to them are not insured. Meanwhile, if you have excess cash this remains in the SIPC insured account, as does any other positions that are securities, like stocks or stock options.

Personally, this sounds funky enough that should anyone ever have to actually use the insurance for futures or excess cash it would be an ugly legal battle, I bet. The universal account is a homegrown product, and I bet insurers would find all sorts of reasons why it didn't cover. Ever hear of anti-concurrent causation exclusions on storm policies. I bet that kind of crap exists in futures land.

Futures positions at IB and at other futures brokers are held in segregated accounts. But there are uninsured.

But what about the cash?

OldTrader

 

[OldTrader]

Personally, this sounds funky enough that should anyone ever have to actually use the insurance for futures or excess cash it would be an ugly legal battle, I bet. The universal account is a homegrown product, and I bet insurers would find all sorts of reasons why it didn't cover. Ever hear of anti-concurrent causation exclusions on storm policies. I bet that kind of crap exists in futures land.

OK, evidently you still don't get it. LOL.

Once again, futures are not covered. Period. So you don't "use the insurance for futures". There aren't any special clauses to worry about in terms of futures, because they aren't covered.

SIPC is widespread at SECURITIES firms, which is where your cash would be held at IB that is in excess of the margin needs for any futures position. This cash is covered according to the terms of SiPC. If you want to read it do an internet search on SIPC. All kinds of information.

Once again, futures are not covered at IB, or anywhere else.

OldTrader

 

[nravo]

Quote from OldTrader:

OK, evidently you still don't get it. LOL.

Once again, futures are not covered. Period. So you don't "use the insurance for futures". There aren't any special clauses to worry about in terms of futures, because they aren't covered.

SIPC is widespread at SECURITIES firms, which is where your cash would be held at IB that is in excess of the margin needs for any futures position. This cash is covered according to the terms of SiPC. If you want to read it do an internet search on SIPC. All kinds of information.

Once again, futures are not covered at IB, or anywhere else.

OldTrader

But the futures (and FOs, I assume) are in a segregated account at futures brokers and (I presume) at IB, right?

That leaves the question of cash, like, let's say $500,000. IB segregate or insure that? What about Futures brokers.

 

[Tums]

Quote from nravo:

But the futures (and FOs, I assume) are in a segregated account at futures brokers and (I presume) at IB, right?

That leaves the question of cash, like, let's say $500,000. IB segregate or insure that? What about Futures brokers.

ROTFLMAO

 

[JackR]

Quote from nravo:

But the futures (and FOs, I assume) are in a segregated account at futures brokers and (I presume) at IB, right?

That leaves the question of cash, like, let's say $500,000. IB segregate or insure that? What about Futures brokers.

Let me try:

You have $100k cash in your IB Universal account. IB puts it into the equities account. That is a SEC regulated account and is covered by SPIC. Therefore $100K is insured by SPIC.

Now suppose you buy 10 ES contracts at $1300 and hold overnight. The initial overnight margin (performance bond) is $4.5K per contract or $45K. IB will transfer $45K from your SPIC protected account to the unprotected futures account. So you'd have $55K cash protected by SPIC and $45K unprotected. When you close your ES position IB will transfer the margin back to your SPIC protected account. Thus, your money is at risk only when trading in the futures market. Since futures are marked to market every day IB will move money back and forth between your Universal account and your futures account as required at the close of business each market day.

IB will auto-liquidate as necessary if your account violates margin requirements. They do this in any account you have and it is a real-time process.

What is missing here is the fact that the futures markets make IB responsible for covering all losses in its customers futures account whether the customer can cover them or not. The rules allow the losses to be applied to all IB's commodities customers to the extent of their commodity account exposure. Bear in mind that for this to happen IB must fail. The commodity losses would be covered by the customers commodity accounts and IB's corporate assets. IB protects us (I'm an IB customer) via the Universal account technique. The most we can lose is what is in the commodity account. The equities account are not IB's assets, they are the account holders. Unlike the commodity account, a bankruptcy cannot touch an equity account to satisfy counter-parties.

None of what I've stated applies to your open position risk which has nothing to do with SPIC.

If you are dealing only with a futures broker the entire account, no matter the $ amount, is at risk.

Your question was about $500K in cash. If IB were to fail SPIC only covers $100K in cash. Cash over $100K is not protected. So the other $400K cash is not protected. If it were in equities it would be covered. If you had over $500K in cash it would be partially covered by the Lloyd's policy as the Lloyd's policy has an aggregate payoff of $30M over all of IB's accounts. I really doubt that $30M would make everyone whole in the event of an IB failure. But I really doubt that IB will fail.

Hope that helps.

Jack

 

[pkts]

You guys who are explaining IB's policy to this guy sure are patient !

Personally, I think he's yanking your chain. But at least I'm more informed now.

 

[kashirin]

Quote from JackR:



Your question was about $500K in cash. If IB were to fail SPIC only covers $100K in cash. Cash over $100K is not protected. So the other $400K cash is not protected. If it were in equities it would be covered. If you had over $500K in cash it would be partially covered by the Lloyd's policy as the Lloyd's policy has an aggregate payoff of $30M over all of IB's accounts. I really doubt that $30M would make everyone whole in the event of an IB failure. But I really doubt that IB will fail.

Hope that helps.

Jack

Aggregate LLoyds insurance is 150M

And it is paid after SIPC
as average account is around 100K
those 150M must be enough to cover most loses in case of disaster even for big accounts

 

[LivonianTrader]

Good explanations, OldTrader and Jack, and very patient !
I happen to be aware of these things because it is clearly stated on their web pages. However there are many things which I cannot find out so easily. I would think IB is a very sophisticated company and handles risk better than most. I am not really worried about them so much, but what about related parties. Where do they keep the cash, with a bank? Where are the stocks, at a clearing firm? What if these related parties go under? I don't really know these behind-the-scenes things, I wonder if one of you knowledgable guys would want to explain what the arrangement is!
Liv

 

[jeb9999]

IB's cash investment policies are clearly stated at their website.

"Investment Policy

As a regulated broker, IB is subject to SEC and CFTC regulations on investment of customer funds. Permissible investment vehicles include bank deposits and a variety of top-rated government securities and related instruments. IB’s effective investment policy is more stringent than this, reflecting our risk-averse philosophy. We only invest customer funds in government securities and repos, cash deposits in bank accounts at the largest banks and the triple A-rated Money Market Funds (in which we invest less than 2% of customer assets).


Additionally, we limit customer exposure through the following credit policies:

Keeping investments in highly liquid, short-term instruments

Distributing client funds among a variety of banks and counterparties to avoid concentrated exposure to any single counterparty

Rigorous analysis by our Credit Committee of Counterparty Financial Conditions as well as review of risk factors prior to permitting investment activity with or via any counterparty

IB’s investment policy is very conservative. Our strict policies when investing client money minimizes our and your exposure in uncertain credit environments. "