IB - buy bonds - what happens if IB fails?

A

alex314159

Hi,

I'm looking for ways to mitigate my loss should Interactive Brokers default (it's a tail event, but still). I trade mostly futures over a few days horizon, so most of the time my account is pure cash. I know there's some sort of guarantee but would rather not test it. My idea was to buy very short dated high quality bonds - IB seems to "only" charge 25% margin on these.

Question: should IB fail, are you the legal owner of the bonds? Is the custody with IB? What would be the process to transfer the custody to some other broker so you can sell your bonds and get the cash out?

Thank you,
 
alex314159 said:
Hi,

I'm looking for ways to mitigate my loss should Interactive Brokers default (it's a tail event, but still). I trade mostly futures over a few days horizon, so most of the time my account is pure cash. I know there's some sort of guarantee but would rather not test it. My idea was to buy very short dated high quality bonds - IB seems to "only" charge 25% margin on these.

Question: should IB fail, are you the legal owner of the bonds? Is the custody with IB? What would be the process to transfer the custody to some other broker so you can sell your bonds and get the cash out?

Thank you,
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As long as you don't have any margin they're yours. My understanding is that any margin and you lose the protection you're looking for.
 
My understanding is the same as @Sig.

Pay 100% cash, they're yours. Use the house's money, its theirs. Pretty simple common sense really !!!

Now, there's also the question of whether you should be putting all your eggs in one basket.
 
You can buy Treasury bonds and still have the SIPC insurance

"SIPC protects stocks, bonds, Treasury securities, certificates of deposit, mutual funds, money market mutual funds and certain other investments as "securities." SIPC does not protect commodity futures contracts (unless held in a special portfolio margining account), or foreign exchange trades, or investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933."
 
Yep, I think so @Sig.

Why not open another account and buy far OTM long dated puts on IB? take the furthest OTM you can find. If they fail, their stock will be zero-ish and you get a payout on another broker.

Some hedgefunds and mm's do that on whatever bank they use... didn't one of the HFT firms make 1bln on puts on Bear or Lehman?
 
Thanks a lot for your replies!

@Sig and @Tim Smith : does it matter if your margin account is actually levered? Say you have a 200k margin account, you buy 100k of AAA bonds, IB "charges" you 25k margin on your 100k purchase. You have no other position. They fail, is the 100k bond you own any protection to you, or is it all IB money?

@JackRab : this was my first idea. Unfortunately there are no LEAPs on IBKR stock so you'd end up rolling short dated options (expensive). Also, how to find a retail broker that's stronger / not correlated to IB? The Black Swan events I'm worried about are a bit like the CHF de-pegging when several retail brokers went down at the same time.
 
Another possibility would be to buy some insurance from Lloyds of London.
IB have a policy but you could get one to cover just your own account.
I have not idea how much it would cost..
 
zdreg said:
if IB fails head for the Carpathian mountains. IB's failure will be the least of your problems.
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Would you loan money to IB at the same rate as you could get for the same tenor U.S. Treasury? If not, there's counterparty risk there. It may not be huge, but it's real and certainly it's much more likely that any single company in the U.S. fails than that we suffer some run for the hills calamity?
 
alex314159 said:
Thanks a lot for your replies!

@Sig and @Tim Smith : does it matter if your margin account is actually levered? Say you have a 200k margin account, you buy 100k of AAA bonds, IB "charges" you 25k margin on your 100k purchase. You have no other position. They fail, is the 100k bond you own any protection to you, or is it all IB money?

@JackRab : this was my first idea. Unfortunately there are no LEAPs on IBKR stock so you'd end up rolling short dated options (expensive). Also, how to find a retail broker that's stronger / not correlated to IB? The Black Swan events I'm worried about are a bit like the CHF de-pegging when several retail brokers went down at the same time.
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That's a good question. If it's possible for you to go with a Reg-T account I'd say you're clearly covered. On the "charging" margin, they're not really charging it, are they. I.E. you're not paying margin interest? They're just reducing your buying power by 25% of the bond value? If they're not charging you margin interest than I'd say you're pretty clearly not entered into a margin contract with them on that security, since exchange of something of value is a basic contract requirement. But we're moving to the realm where you shouldn't be listening to internet jokers like me and consulting an attorney with experience in this area. Whatever you do don't trust what an IB rep tells you. If you read the thread about if you are exposed to counterparty risk if you opt into the stock loan program, you'll see the IB rep is far from open and honest on this particular subject.
 
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