IB changes interest calc from LIBOR to Fed Funds

Quote from pkts:

Well...that party couldn't last forever...just got an email from IB saying they're changing to Fed Funds as the benchmark from LIBOR. Obviously LIBOR had better rates.

http://www.ny.frb.org/markets/omo/dmm/fedfundsdata.cfm

http://individuals.interactivebrokers.com/en/accounts/fees/monthlyInterestRates.php?ib_entity=llc

Some truly bizarre divergences that AREN'T in our favor.

EG. 8/10 ff=4.68 LIBOR 5.9

Extreme example...the LIBOR is, on average, 10 BP better than FF.
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What's wrong with paying less interest?
 
Quote from Nasdaq5048:

What's wrong with paying less interest?
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Haha...I hadn't even thought of that.

I trade futures so I don't use Margin (in the stock sense of it). But I guess its nice for you margined stock traders. Me.....I like more interest earned.
 
Quote from pkts:

Well...that party couldn't last forever...just got an email from IB saying they're changing to Fed Funds as the benchmark from LIBOR. Obviously LIBOR had better rates.

http://www.ny.frb.org/markets/omo/dmm/fedfundsdata.cfm

http://individuals.interactivebrokers.com/en/accounts/fees/monthlyInterestRates.php?ib_entity=llc

Some truly bizarre divergences that AREN'T in our favor.

EG. 8/10 ff=4.68 LIBOR 5.9

Extreme example...the LIBOR is, on average, 10 BP better than FF.
More...

Obviously what benefits IB in terms of paying interest, is detrimental when it comes to charging interest. I think Fed Funds are more volatile than Libor.

What you didn't mention was the information about where IB invests customer funds. I would encourage folks to read it in full.

OldTrader
 
So just to guage the market out there...but my funds are held at a number of different clearing firms...MAN, RCG, GHCO, IB and such....sure I have money in t-bills getting the interest, but what does anyone out there know when it comes to the interest they are getting on my non-tbilled funds?

I'm aware after reading some of their disclaimers that they do hold the money in money market funds, but one has to wonder how much money they are making off regular seg funds that just sit there.
 
Where did it say it use the Fed fund as benchmark. I still see overnight LIBOR as the benchmark.

But if this is really the case, i guess that explains why the EFP is 0.2% lower across the board. I think IB's customers should really consider EFP if they have excess cash and dont like earning a fed fund interest.
 
Quote from Nasdaq5048:

Where did it say it use the Fed fund as benchmark. I still see overnight LIBOR as the benchmark.

But if this is really the case, i guess that explains why the EFP is 0.2% lower across the board. I think IB's customers should really consider EFP if they have excess cash and dont like earning a fed fund interest.
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In an email sent out today -- effective Sept 1.

I would hope it should not impact EFPs bec I would think the population of EFP traders is larger than the IB customer base, but who knows.
 
Here is an extract:

Information About Customer Funds Investment and Interest Benchmarks

In light of recent market volatility and increased concern over liquidity and credit exposure, we would like IB clients to be aware of our investment philosophy regarding their funds.

IB’s Policy on Customer Funds Investment

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 even 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 JP Morgan Prime Fund (in which we invest less than 1% 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 condition, 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 minimize our and your exposure in uncertain credit environments.

Benchmark rates in USD changing from Libor to Fed Funds

In order to ensure that the benchmark IB uses for interest calculations accurately tracks our investment policies, IB will change its reference rate for USD interest from Libor to Fed Funds. Specifically, we will use the Fed Funds Effective rate which is announced daily by the US Federal Reserve and represents the weighted average of all transactions executed the previous day. This change will take effect 1 September 2007. For reference, the value on Friday, 24 August was 5.11.

More information about the Fed Funds reference rate as well as the official published values can be found on the website of the NY Federal Reserve Bank:
http://www.ny.frb.org/markets/omo/dmm/fedfundsdata.cfm.
 
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