IB users who lend out their long shares..

[Sig]

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.

Ironically I'm doing exactly the same thing as you. You asked them to post on their website the impact of a Chapter 11 on clients. I provided here to the person who asked the impact on clients of a Chapter 11 and corrected some misleading information provided by the company representative. The only difference in constructiveness is that my actions provided actionable, correct information today that is available for anyone reading this from this point forward and specifically the OP asking the question. Your suggestion may provide the same information at some undetermined date in the future. Which is not to say I disagree with your suggestion, I think it's a good one and hope IB takes you up on it. I see no reason why you shouldn't think equally highly of providing that information here and now, and I don't understand why you'd criticize me for providing it?

As a side benefit, my actions exposed the duplicitous and misleading approach that the IB rep here uses. Your approach seems to be attempting to minimize that, which is baffling to me.

It's also important to distinguish that a rep from a company representing that company doesn't get to shield themselves behind some kind of "this is just personal advice" shield. There's an important nuance to the experience you described. The MF global reps couldn't bind MF global to actions that were contrary to U.S. bankruptcy law. That's very different than saying that a rep can't be held responsible for something they represent to be the company policy or the company's agreement with a customer, or that a rep can't be held responsible and accountable for simply being dishonest with a customer regardless of if there is a T&C somewhere to the contrary. There's no section of U.S. law that says "buyer beware, customer service reps can lie at will and you have to assume it's their personal opinion even when they're representing the company". Quite to the contrary there's a large body of consumer protection law and case law that says company's are bound to the statements made by their representatives.

 

[sprstpd]

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.

The solution is to put him on ignore.

 

[tonyf]

The solution is to put him on ignore.

i wouldn't - he has interesting thoughts.
It's just a matter of redirecting his enthusiasm to his own (and our) benefit.

 

[tonyf]

Ironically I'm doing exactly the same thing as you. You asked them to post on their website the impact of a Chapter 11 on clients. I provided here to the person who asked the impact on clients of a Chapter 11 and corrected some misleading information provided by the company representative. The only difference in constructiveness is that my actions provided actionable, correct information today that is available for anyone reading this from this point forward and specifically the OP asking the question. Your suggestion may provide the same information at some undetermined date in the future. Which is not to say I disagree with your suggestion, I think it's a good one and hope IB takes you up on it. I see no reason why you shouldn't think equally highly of providing that information here and now, and I don't understand why you'd criticize me for providing it?

As a side benefit, my actions exposed the duplicitous and misleading approach that the IB rep here uses. Your approach seems to be attempting to minimize that, which is baffling to me.

It's also important to distinguish that a rep from a company representing that company doesn't get to shield themselves behind some kind of "this is just personal advice" shield. There's an important nuance to the experience you described. The MF global reps couldn't bind MF global to actions that were contrary to U.S. bankruptcy law. That's very different than saying that a rep can't be held responsible for something they represent to be the company policy or the company's agreement with a customer, or that a rep can't be held responsible and accountable for simply being dishonest with a customer regardless of if there is a T&C somewhere to the contrary. There's no section of U.S. law that says "buyer beware, customer service reps can lie at will and you have to assume it's their personal opinion even when they're representing the company". Quite to the contrary there's a large body of consumer protection law and case law that says company's are bound to the statements made by their representatives.

So you want blood...not my game. Will stay out. I actually like the Def guy.

 

[Sig]

So you want blood...not my game. Will stay out. I actually like the Def guy.

I get and respect that you're a non-confrontational kind of person. And to make myself a better person I try to figure out how things look from your point of view. So I'm genuinely curious why you would think providing accurate and actionable information on the OPs question on potential downsides of short lending are bad or out for blood?
I get that you'd give @def a little more leeway. I'll admit my view is colored by a frustrating series of conversations with very similar IB reps about things like their incorrect calculation of max loss on vertical spreads, this very same topic, and several others combined with my frustration over having sunk a big chunk of time into their API which made me stay with them longer than I otherwise would have. I realize you may not have experienced that (yet!). And I personally would have loved to have someone give me a full, unvarnished heads up on all that, a favor I'm trying to pay forward. But regardless of one's feelings on @def, I just don't get any downside to putting out correct information to the OPs question and pointing out incorrect information that's posted regardless of who posted it and am genuinely curious as to why you seem to be discouraging it and feel it's not constructive or useful?

 

[IB-AN]

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!

Perhaps what you refer to as an "obfuscation strategy" is instead an honest attempt to answer a question where your premise is wrong.

• Clients do not receive FDIC insurance on any assets held in their securities account, cash or otherwise. They are eligible for SIPC insurance up to the stated amounts. Note that we do offer a Insured Bank Deposit Sweep Program to obtain FDIC insurance on cash balances above the SIPC limit, but that is accomplished by effectively transferring the cash outside of the securities account into a bank account though a promontory program.

• If a customer elects to participate in our Yield Enhancement Program, we will look to lend their Fully-Paid or Excess Margin (i.e., the amount above 140% of their margin loan) securities. These are securities which, absent the Program agreement, we would not have a right to lend. As is the case with any securities lending we do, the borrower fully collateralizes the stock loan with cash (typically the proceeds from the short sale generating the borrow demand) and that loan is marked-to-market daily and there are counterparty lending limits enforced as well. That cash is deposited into a Special Reserve Bank Account titled for the exclusive use of customers, the same account that broker are required to establish for purposes of segregating customer cash deposits.

• If a SIPC event were to occur, the appointed trustee would gather all of the customer property to determine whether a deficiency existed, coverage was warranted and whether clients' claims would be prorated due to insufficient assets and insurance caps. Included in that customer property would be the cash balance held in the Special Reserve Bank Account.

• So, while it's clear that there's a required disclosure that SIPC may not return your securities loaned under the Yield Enhancement Program (as they are held elsewhere), the cash collateral securing that loan is available as customer property instead.

• Is there any risk to stock lending? Yes. If the stock increases in price, the borrowing broker is unable to meet the daily mark-to-market or return the shares, then we'd be obligated to use the cash collateral and our capital to replace the shares. If those resources were insufficient, we'd face a SIPC event. Does the Yield Enhancement Program offer us the opportunity to conduct more stock lending than we might have otherwise? Yes, but we believe that we have the resources and policies in place to adequately manage this risk.

 

[Sig]

Perhaps what you refer to as an "obfuscation strategy" is instead an honest attempt to answer a question where your premise is wrong.

• Clients do not receive FDIC insurance on any assets held in their securities account, cash or otherwise. They are eligible for SIPC insurance up to the stated amounts. Note that we do offer a Insured Bank Deposit Sweep Program to obtain FDIC insurance on cash balances above the SIPC limit, but that is accomplished by effectively transferring the cash outside of the securities account into a bank account though a promontory program.

• If a customer elects to participate in our Yield Enhancement Program, we will look to lend their Fully-Paid or Excess Margin (i.e., the amount above 140% of their margin loan) securities. These are securities which, absent the Program agreement, we would not have a right to lend. As is the case with any securities lending we do, the borrower fully collateralizes the stock loan with cash (typically the proceeds from the short sale generating the borrow demand) and that loan is marked-to-market daily and there are counterparty lending limits enforced as well. That cash is deposited into a Special Reserve Bank Account titled for the exclusive use of customers, the same account that broker are required to establish for purposes of segregating customer cash deposits.

• If a SIPC event were to occur, the appointed trustee would gather all of the customer property to determine whether a deficiency existed, coverage was warranted and whether clients' claims would be prorated due to insufficient assets and insurance caps. Included in that customer property would be the cash balance held in the Special Reserve Bank Account.

• So, while it's clear that there's a required disclosure that SIPC may not return your securities loaned under the Yield Enhancement Program (as they are held elsewhere), the cash collateral securing that loan is available as customer property instead.

• Is there any risk to stock lending? Yes. If the stock increases in price, the borrowing broker is unable to meet the daily mark-to-market or return the shares, then we'd be obligated to use the cash collateral and our capital to replace the shares. If those resources were insufficient, we'd face a SIPC event. Does the Yield Enhancement Program offer us the opportunity to conduct more stock lending than we might have otherwise? Yes, but we believe that we have the resources and policies in place to adequately manage this risk.

Thank you, pretty much the perfect answer that addresses all the questions/issues!

 

[def]

Thank you, pretty much the perfect answer that addresses all the questions/issues!

Thanks AN for spelling things out to Sigs questions very directly. You hit the nail on the head as usual.

 

[yeahso]

As IB said participant can sell their lent stock anytime, does he/she has to process a successfully recall stock step before selling the stocks?
In case it is not required, how IB fulfil the settlement within the sales order settlement cycle (T+2) if the shares are loaned out and recall cannot back in time?

 

[IB-AN]

The shares will be recalled based on settlement projections (which may suggest we have, or will have, shares available to lend at that time) and a buy in executed if they aren’t returned. There is a chance that the buy in might not settle in time to make delivery on the closing sale, however, there are clearinghouse provisions which effectively recognize this lag and ensure that the end client is not impacted.