IB users who lend out their long shares..

[def]

So this is the same non-answer that you provide the last time. Simple question:
Is the cash collateral received for the loaned securities deposited to the customers account and protected by FDIC in the same manner as any other cash in their account or not? Simple yes or no answer would be great!

It is not a non-answer. The cash goes into the segregated client account pool. In the extremely unlikely event we burn through over $7 billion in equity and need to rely on SIPC protection, there is no way to determine what SIPC will do. The segregated cash stock balances of course are managed extremely conservatively, nothing off balance sheet etc.

As for using fully paid vs margin, we are not a charity and certainly use margin stock when possible but then again we wouldn't seek external lending if we needed to either. However we do to the tune I believe in the billions. SYEP income to some clients, is also substantial - very substantial. It is completely optional to opt in. I personally do and have rec'd some modest income and take a simple viewpoint. To me it is simple, if I can earn a few extra bucks, why not.

 

[Sig]

It is not a non-answer. The cash goes into the segregated client account pool. In the extremely unlikely event we burn through over $7 billion in equity and need to rely on SIPC protection, there is no way to determine what SIPC will do. The segregated cash stock balances of course are managed extremely conservatively, nothing off balance sheet etc.

As for using fully paid vs margin, we are not a charity and certainly use margin stock when possible but then again we wouldn't seek external lending if we needed to either. However we do to the tune I believe in the billions. SYEP income to some clients, is also substantial - very substantial. It is completely optional to opt in. I personally do and have rec'd some modest income and take a simple viewpoint. To me it is simple, if I can earn a few extra bucks, why not.

We all see what you did there. I specifically asked if the cash held in escrow had FDIC protection. You reply with a bunch of gobbledygook about SPIC protection and again fail utterly and completely to answer a simple yes or no question about FDIC protection! Then have the gall to insist you're answering the question! At this point it's unclear to me if you're being intellectually dishonest or if your'e really just not intelligent enough to understand the question?

It baffles me why you're being so obtuse on this. Clearly, an account holder does not have FDIC protection on the cash that is held in escrow when their shares are lent under your lending program. Just admit it, your continual dodging of the question simply reinforces the overall dodginess of IB, there's absolutely no justification for it!

Also clearly an account holder does not have SPIC protection on the shares that are lent. It's incredible to me that you would say "there is no way to determine what SIPC will do." with the escrow cash, but apparently we shouldn't care because it's very unlikely we'll need it. Let me give you another yes or no question. Can IBKR borrow money by issuing a bond at the risk free rate? Since we know you either won't or won't be capable of answer that question I'll answer it for you...no. You'll have to pay some additional interest rate, as does every corporation no matter how solid. That additional interest reflects the small but non-zero chance that they'll default. That's why we have SIPC insurance. If we're giving up SIPC insurance, number one it's unconscionable that you'd not only not tell us but actively try to avoid telling us. Number two, any time anyone gives up an insured product to rely on your credit, they insist on getting that additional interest to make up for the fact that there's now a small but non-zero chance of you defaulting. You don't provide that.

Finally, public service announcement here. If a stock has options there's no reason to let IB steal half your lending rate while stripping you of SPIC insurance protection. You can simply enter a synthetic long position, selling the put and buying the call, and you'll capture the entire borrow rate while maintaining SPIC protection on your option position because put call parity is violated by the amount of the borrow rate. You may loose out on LT gains status compared to holding the stock position, but we're all traders here anyway right

 

[def]

We all see what you did there. I specifically asked if the cash held in escrow had FDIC protection. You reply with a bunch of gobbledygook about SPIC protection and again fail utterly and completely to answer a simple yes or no question about FDIC protection! Then have the gall to insist you're answering the question! At this point it's unclear to me if you're being intellectually dishonest or if your'e really just not intelligent enough to understand the question?

It baffles me why you're being so obtuse on this. Clearly, an account holder does not have FDIC protection on the cash that is held in escrow when their shares are lent under your lending program. Just admit it, your continual dodging of the question simply reinforces the overall dodginess of IB, there's absolutely no justification for it!

Also clearly an account holder does not have SPIC protection on the shares that are lent. It's incredible to me that you would say "there is no way to determine what SIPC will do." with the escrow cash, but apparently we shouldn't care because it's very unlikely we'll need it. Let me give you another yes or no question. Can IBKR borrow money by issuing a bond at the risk free rate? Since we know you either won't or won't be capable of answer that question I'll answer it for you...no. You'll have to pay some additional interest rate, as does every corporation no matter how solid. That additional interest reflects the small but non-zero chance that they'll default. That's why we have SIPC insurance. If we're giving up SIPC insurance, number one it's unconscionable that you'd not only not tell us but actively try to avoid telling us. Number two, any time anyone gives up an insured product to rely on your credit, they insist on getting that additional interest to make up for the fact that there's now a small but non-zero chance of you defaulting. You don't provide that.

Finally, public service announcement here. If a stock has options there's no reason to let IB steal half your lending rate while stripping you of SPIC insurance protection. You can simply enter a synthetic long position, selling the put and buying the call, and you'll capture the entire borrow rate while maintaining SPIC protection on your option position because put call parity is violated by the amount of the borrow rate. You may loose out on LT gains status compared to holding the stock position, but we're all traders here anyway right

In your reply where I used SIPC which was quoted I just assumed you swapped FDIC with SIPC - yep silly me for not spending great amount of detail and time in each of my responses. I was talking about the cash collateral deposited in the segregated account but I'm not going to spend time reading into each line and comment you made nor think it is a big issue given our shareholder equity. Thanks for so politely and eloquently pointing that out.

So let's get this straight and I will quote you so there is no error here. You say "If a stock has options there's no reason to let IB steal half your lending rate while stripping you of SPIC insurance protection." Steal is a strong word and insinuates we are doing something dishonest and wrong. That is totally false and way out of line. No one is forcing anyone to sign up. The details are disclosed and clients can make the choice themselves. Other firms are not offering this option and a team of people with the backing of IB's credit and relationships built over years with the street do all the work and in return we offer and split the extra yield. I get it for you, you may not think IB is safe and wouldn't enroll. However, the vast majority I believe understand the extreme low risk of IB failing on its obligations, would have no worries and frankly prefer having the potential to earn some cash with what would be considered a win/win situation for most people.

So for you the risk of losing SIPC is more important than you than capital gains status and earning some extra bucks. That is fair and would be your choice. I know many others who are enjoying the extra yield and are quite thrilled they decided to enroll.

 

[Sig]

In your reply where I used SIPC which was quoted I just assumed you swapped FDIC with SIPC - yep silly me for not spending great amount of detail and time in each of my responses. I was talking about the cash collateral deposited in the segregated account but I'm not going to spend time reading into each line and comment you made nor think it is a big issue given our shareholder equity. Thanks for so politely and eloquently pointing that out.

So let's get this straight and I will quote you so there is no error here. You say "If a stock has options there's no reason to let IB steal half your lending rate while stripping you of SPIC insurance protection." Steal is a strong word and insinuates we are doing something dishonest and wrong. That is totally false and way out of line. No one is forcing anyone to sign up. The details are disclosed and clients can make the choice themselves. Other firms are not offering this option and a team of people with the backing of IB's credit and relationships built over years with the street do all the work and in return we offer and split the extra yield. I get it for you, you may not think IB is safe and wouldn't enroll. However, the vast majority I believe understand the extreme low risk of IB failing on its obligations, would have no worries and frankly prefer having the potential to earn some cash with what would be considered a win/win situation for most people.

So for you the risk of losing SIPC is more important than you than capital gains status and earning some extra bucks. That is fair and would be your choice. I know many others who are enjoying the extra yield and are quite thrilled they decided to enroll.

Dude, the whole freaking thread was about the difference between SIPC and FDIC and which one applied. As was the last thread where you did exactly the same thing. That was a minor "detail" you couldn't be bothered to understand? Are you freaking kidding me? If you're going to do a half-ass job at your job and can't even be bothered to read the thread you're responding to...well that epitomizes what you call "customer service" at IB!

If anyone is "out of line" it's the guy who obfuscates and refuses to answer yes or no questions about which insurance covers your customers. That you're too pedantic to realize that my use of "steal" wasn't an accusation of literal criminal activity tells me that you may be a bit Aspergery, so I'm tempted to give you a little benefit of the doubt. However if so, it would indicate, along with your complete inability to provide any customer service, that you're in absolutely the wrong profession.

Again, though, thanks for being so predictably bad. I was able to predict with 100% accuracy how you'd respond at the beginning of this thread and you didn't disappoint!

 

[def]

Dude, the whole freaking thread was about the difference between SIPC and FDIC and which one applied. As was the last thread where you did exactly the same thing. That was a minor "detail" you couldn't be bothered to understand? Are you freaking kidding me? If you're going to do a half-ass job at your job and can't even be bothered to read the thread you're responding to...well that epitomizes what you call "customer service" at IB!

If anyone is "out of line" it's the guy who obfuscates and refuses to answer yes or no questions about which insurance covers your customers. That you're too pedantic to realize that my use of "steal" wasn't an accusation of literal criminal activity tells me that you may be a bit Aspergery, so I'm tempted to give you a little benefit of the doubt. However if so, it would indicate, along with your complete inability to provide any customer service, that you're in absolutely the wrong profession.

Again, though, thanks for being so predictably bad. I was able to predict with 100% accuracy how you'd respond at the beginning of this thread and you didn't disappoint!

Actually it was pretty much you who raised SIPC and FDIC and you seem very bright, perhaps have experience at other brokerage firms and know about Rule 15c3-3(e) where the collateral is deposited. The OP wanted to know of pros/cons, expected return and if other brokers offered a similar service.

For those that may not know (I'll quote from FINRA)... Enacted in 1972 by the SEC, Rule 15c3-3 is designed to protect client accounts at securities brokerage firms. ... In short, the rule dictates the amount of cash and securities that broker-dealer firms must segregate in specially-protected accounts on behalf of their clients. Now with the rule being 800 page long, I'm not going to pretend I know all the ins and outs of it or am I qualified to answer any further questions - but the rule requires that funds or qualified securities in the reserve account must at least be equal in value to the net cash owed to customers and we state on our site that the cash collateral received from the loan securities is segregated within this account. You may call this obfuscation but that's the best I can provide.

I won't take your bait and will take your insults with a grain of salt. I'll just have to take small comfort thinking or just hoping there might be one or two people on this site or within our client base or trading community who will disagree with your opinion of me, my job and perhaps think I added some value to the trading profession over the years. LOL and goodnight.

 

[tonyf]

Just my 2 cents here. @def is doing his best. I can attest this first hand. He is exceptionally helpful. We are stretching him by asking him highly specific regulatory questions. Now I too would like specific IF THEN answers but fear that this is not straightforward.

Last, we can keep this conversation civic and insult free. I am sure it will benefit us more.

@def - an idea for IB is to perhaps to create a page on their site titled something along the lines of "what is likely to happen to my monies and assets if IB files for Ch. 11"? A long shot I know but most people have lived through Lehman and are now more wary. Something that covers multiple scenarios (US residents vs international clients, individual vs corporates, sub $250k vs >10m AUM, margin vs cash, etc....)

I worked myself on the liquidation of Lehman in Europe (LBIE) and MF Global (UK) for years. Clarity on that front will certainly work to IB's advantage and will surely compensate/mitigate the BBB+ credit rating.

Just a suggestion for upper management

 

[Sig]

Just my 2 cents here. @def is doing his best. I can attest this first hand. He is exceptionally helpful. We are stretching him by asking him highly specific regulatory questions. Now I too would like specific IF THEN answers but fear that this is not straightforward.

Last, we can keep this conversation civic and insult free. I am sure it will benefit us more.

@def - an idea for IB is to perhaps to create a page on their site titled something along the lines of "what is likely to happen to my monies and assets if IB files for Ch. 11"? A long shot I know but most people have lived through Lehman and are now more wary. Something that covers multiple scenarios (US residents vs international clients, individual vs corporates, sub $250k vs >10m AUM, margin vs cash, etc....)

I worked myself on the liquidation of Lehman in Europe (LBIE) and MF Global (UK) for years. Clarity on that front will certainly work to IB's advantage and will surely compensate/mitigate the BBB+ credit rating.

Just a suggestion for upper management

I can see where you're coming from and I might be inclined to give them the benefit of the doubt except:
-We had this exact same discussion here on ET where they engaged in the exact same obfuscation strategy (https://www.elitetrader.com/et/threads/ib-yield-enhancement-program-question.301819/) so they clearly know what the issue is and this is their regular response to those types of questions.
-@ET180 and I had multiple posts that were specifically about the difference between FDIC and SIPC protection and which applied, in fact the vast majority of the posts on the thread and the posts @def was replying to! were discussing this. And yet he "conveniently" decided that I had made a mistake and swapped FDIC for SIPC. Seriously? And then comes back with "yep silly me for not spending great amount of detail and time in each of my responses." as if it was some minor matter and not the entire point of the entire conversation they jumped in on and I was somehow being unreasonable? Again, seriously? The first principle to assume the customer is an idiot is common to every IB rep I've spoken to, so I guess maybe they train them that way?
-After all that and multiple requests for a yes or no answer, they actually have yet to answer the freaking question on if the cash collateral is FDIC covered! Clearly it isn't, why are they doing the flim flam artist thing to avoid answering such a simple question?
-Then there's the twisting of my detailed explanation of the fact of every corporation's "small but non-zero chance that they'll default." into "I get it for you, you may not think IB is safe". Again purposely attempting to ignore the point that customers should expect compensation for losing SIPC and FDIC protection and instead twisting it into some kind of "IB is so safe why do you dare doubt us" bullshit.
-And then there's the self-righteous huff he worked himself into with his pedantic literalist interpretation of my use of the world "steal" as if I was accusing IB of an actual criminal act when I pointed out anyone can avoid giving half the borrow rate to IB (which is risk free money to them) and losing insurance protection by simply setting up a synthetic long. Are you freaking kidding me? If you told the guy "The price on this car is a steal" would he think you're literally going to go hotwire the car? Give me a break!

A straightforward read of this exchange is that both IB and this rep or at least the rep are being as evasive as possible on this particular subject, in which case snowball's chance in hell they'll take your advice. In fact if you read their posts you'll see that any time anyone questions their insurance coverage or SIPC/FDIC coverage they always default to the "its inconceivable such a well capitalized company as ours would ever default" answer rather than actually answering the question. You'll find that probably a dozen times here. Which begs the question as to why they have the Lloyds insurance or the FDIC splitting into bank accounts thing in the first place. So bottom line, guarantee they'll even entertain discussing that there's ever any chance at all of them defaulting, let alone what would happen to your stock/futures/cash if they did.

It's actually a far more charitable read that the rep is simply too lazy to read the questions they're answering and like some great electrical engineers I know take everything they hear absolutely literally and answer very abruptly. In that case at least IB isn't being dishonest and evasive as a matter of policy. But like I said, that kind of thing might make for a great engineer but it's the worst possible combination for someone ostensibly providing "customer service", of which this is one of the worst possible examples. Warning to everyone, this rep and this runaround is exactly representative of what you'll get any time you contact what they call "customer service" at IB.

BTW, being civil is answering folks questions in a straightforward manner, not assuming they're stupid and don't know the difference between something like FDIC and SIPC in a conversation that's specifically about the difference between FDIC and SIPC, and not purposely twisting their words to say something nearly opposite what they actually said. Calling out an uncivil behavior in that regard is not in any way uncivil, if you don't call people and especially companies on bullshit they'll just keep feeding it to you.

 

[tonyf]

I can see where you're coming from and I might be inclined to give them the benefit of the doubt except:
-We had this exact same discussion here on ET where they engaged in the exact same obfuscation strategy (https://www.elitetrader.com/et/threads/ib-yield-enhancement-program-question.301819/) so they clearly know what the issue is and this is their regular response to those types of questions.
-@ET180 and I had multiple posts that were specifically about the difference between FDIC and SIPC protection and which applied, in fact the vast majority of the posts on the thread and the posts @def was replying to! were discussing this. And yet he "conveniently" decided that I had made a mistake and swapped FDIC for SIPC. Seriously? And then comes back with "yep silly me for not spending great amount of detail and time in each of my responses." as if it was some minor matter and not the entire point of the entire conversation they jumped in on and I was somehow being unreasonable? Again, seriously? The first principle to assume the customer is an idiot is common to every IB rep I've spoken to, so I guess maybe they train them that way?
-After all that and multiple requests for a yes or no answer, they actually have yet to answer the freaking question on if the cash collateral is FDIC covered! Clearly it isn't, why are they doing the flim flam artist thing to avoid answering such a simple question?
-Then there's the twisting of my detailed explanation of the fact of every corporation's "small but non-zero chance that they'll default." into "I get it for you, you may not think IB is safe". Again purposely attempting to ignore the point that customers should expect compensation for losing SIPC and FDIC protection and instead twisting it into some kind of "IB is so safe why do you dare doubt us" bullshit.
-And then there's the self-righteous huff he worked himself into with his pedantic literalist interpretation of my use of the world "steal" as if I was accusing IB of an actual criminal act when I pointed out anyone can avoid giving half the borrow rate to IB (which is risk free money to them) and losing insurance protection by simply setting up a synthetic long. Are you freaking kidding me? If you told the guy "The price on this car is a steal" would he think you're literally going to go hotwire the car? Give me a break!

A straightforward read of this exchange is that both IB and this rep or at least the rep are being as evasive as possible on this particular subject, in which case snowball's chance in hell they'll take your advice. In fact if you read their posts you'll see that any time anyone questions their insurance coverage or SIPC/FDIC coverage they always default to the "its inconceivable such a well capitalized company as ours would ever default" answer rather than actually answering the question. You'll find that probably a dozen times here. Which begs the question as to why they have the Lloyds insurance or the FDIC splitting into bank accounts thing in the first place. So bottom line, guarantee they'll even entertain discussing that there's ever any chance at all of them defaulting, let alone what would happen to your stock/futures/cash if they did.

It's actually a far more charitable read that the rep is simply too lazy to read the questions they're answering and like some great electrical engineers I know take everything they hear absolutely literally and answer very abruptly. In that case at least IB isn't being dishonest and evasive as a matter of policy. But like I said, that kind of thing might make for a great engineer but it's the worst possible combination for someone ostensibly providing "customer service", of which this is one of the worst possible examples. Warning to everyone, this rep and this runaround is exactly representative of what you'll get any time you contact what they call "customer service" at IB.

BTW, being civil is answering folks questions in a straightforward manner, not assuming they're stupid and don't know the difference between something like FDIC and SIPC in a conversation that's specifically about the difference between FDIC and SIPC, and not purposely twisting their words to say something nearly opposite what they actually said. Calling out an uncivil behavior in that regard is not in any way uncivil, if you don't call people and especially companies on bullshit they'll just keep feeding it to you.

So I don't get it - you have identified an operational risk that you are uncomfortable with. Fine! Stay clear of stock lending. Even better, nominate someone else on your account to double your FDIC coverage (i.e. joint account).
What is the point of all this ranting?
@def is here to help (he does not have to respond - I wouldn't in his place). Let's try to spin all that energy into positive suggestions that he could action.... or stay clear otherwise.

 

[Sig]

So I don't get it - you have identified an operational risk that you are uncomfortable with. Fine! Stay clear of stock lending. Even better, nominate someone else on your account to double your FDIC coverage (i.e. joint account).
What is the point of all this ranting?
@def is here to help (he does not have to respond - I wouldn't in his place). Let's try to spin all that energy into positive suggestions that he could action.... or stay clear otherwise.

The point is that someone asked a point blank question about the potential downsides of lending out shares. In fact it was the original poster, in the original post! ("1. are there any disadvantages of lending out the shares?"). I am simply answering the question that started the thread. That's not ranting, that's pretty much the point of why we're here, no?
The IB rep was providing what I knew to be misleading and obfuscating answers to the original posters question and the ensuing discussion. I was correcting that misleading information and pointing out how underhanded it was for the IB rep to engage in that behavior. Do you consider that to be out of line?

I'm all for "being positive". Sadly it turns out "being positive" isn't a viable strategy to fight misleading and intellectually dishonest behavior. Calling it out is. If you dispute the accuracy of anything I stated I'd love to hear it. Criticizing me for pointing out the bad behavior of the IB rep...not sure why you'd do that?

 

[tonyf]

The point is that someone asked a point blank question about the potential downsides of lending out shares. In fact it was the original poster, in the original post! ("1. are there any disadvantages of lending out the shares?"). I am simply answering the question that started the thread. That's not ranting, that's pretty much the point of why we're here, no?
The IB rep was providing what I knew to be misleading and obfuscating answers to the original posters question and the ensuing discussion. I was correcting that misleading information and pointing out how underhanded it was for the IB rep to engage in that behavior. Do you consider that to be out of line? Do you dispute anything I asserted?

I am obviously not as confrontational as you are - and am not disputing anything you assert (neither condemn nor approve). But I am driven by actionable solutions as a trader. And my contribution here is to spin the conversation in that direction.
I remember clearly in the MF Global liquidation client creditors who attached emails from staff to support the priority of their claim in the cash payment waterfall. This informal communication was tested in court and could not stand. You should view everything Def says as personal advice and revert back to the T&Cs for legal.
Even better, make constructive suggestions as I am trying to do.