I got an e-mail yesterday about the IBKR Notes program. It sounds good. They allow you to automatically invest your spare cash into short term notes for a yield, but what's the catch? What happens if you buy something and use up more than the spare cash available? Does it sell the notes in order to avoid using margin? Obviously the margin rate would be much higher than the interest rate from the notes so it would be self-defeating to buy these notes and then use margin. What's the risk on the notes? Looks like they issued by IB. I clicked on the learn more button, but it just took me to the sign-up page. I googled the program, but could not find anything about it.
IBKR Notes Program
- Thread starter ET180
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You have to be accredited, and when you sign up you are asking for the memorandum and subscription agreement. The details are in there. If you are not accredited, then you are not qualified, of course. Hope that helps. Since it is from IB, I should not be posting the details etc. All good question though.
You're buying unsecured debt in IB. Even worse, you're buying unsecured debt in a holding company that actually has no assets of its own, but owns the constituent parts of IB so hopefully they'll provide the cash necessary to pay off the notes. And somewhere Peterffy owns 70% of something important which makes it appear that you're basically at his mercy to do whatever the heck he wants. None of which makes it necessarily a bad thing, but it's not different than investing in corporate notes issued by Citibank or Ford or Walmart. You're entirely exposed to their credit risk and a whole set of complex terms that are idiosyncratic to this offering, it's up to you to determine if the rate of return above the risk free rate is commensurate with that risk. It's very different from letting them invest your funds in their bank sweep program or even just leaving them in your account where they're protected by SIPC or FIDC insurance and are segregated customer funds. You're lending them money to do what they wish with and they're telling you they'll do their best to pay your back, which is a completely different thing from them holding funds in your IB account.
But if you have extra cash, more than is covered in the FDIC sweeps, you could earn more by investing in short term IB corporate paper. 60 days is very short term, so credit risk should be very low, never mind IB has tons of excess capital (and won’t pay it out as dividends, perhaps to the annoyance of their shareholders).
maybe they’re financing extra margin lending with this? Borrow at 0.5%, lend at 1%, all in house?
When I click on the Learn More button, it takes me to my account management page to sign some agreements. I have not enrolled in the program and it seems like you tell them how much of your spare cash to allocate to these notes and then they just buy them for you. I don't really know how it works to be honest so that's why I asked. I can't find a link to the program through Google.
Absolutely, just important to go in eyes wide open that on what you're investing in. There are hundreds of companies that issue short term paper, and plenty of ETFs who invest in a bunch of them to diversify your risk. If I was an IB customer it wouldn't make any sense to concentrate my risk in one issuer plus the risk to my brokerage account if anything happens to IB when I could just as easily diversify it away with an ETF, but that's just my perspective and there isn't a right or wrong answer. Not for nothing it's limited to accredited investors, there are probably more than a few retail folks who would see this as having the same risk as a bank or broker deposit when it's actually far higher.
Also, I find it interesting that IB is availing themselves of this somewhat cumbersome and expensive method of financing. They should be able to sell notes on the institutional market for significantly less than this if their risk of default is close to zero as many folks here seem to think it is. Much cheaper and less of a PITA. There's a reason why they're doing this instead, and it probably doesn't reflect well on the relative risk of these notes.
Who is IBG LLC? If this is IB's "mother ship" then it gives me the impression that they don't want to go to the open market with their short term notes. But rather try to place these among their customer base, similar to a private placement. This might give them a cost benefit.
It's not a coat benefit if they are paying .5% interest while most other investment grade companies are able to sell notes for .2-.3%!