Interactive Brokers - is Llyod's insurance of 150m enough?

[helpme_please]

One thing good about Interactive Brokers is that it is extra insurance on top of SIPC coverage of 500k. However, this extra insurance is only up to an extra 150m (See link at bottom). Given that IBKR is such a large broker, can the extra 150m be enough to cover all its clients? A few hedge funds and institutional investors would have blow through this 150m limit. Is this concern valid?

https://www.interactivebrokers.com/en/index.php?f=ibgStrength&p=acc&ns=T

Customer securities accounts at Interactive Brokers LLC are protected by the Securities Investor Protection Corporation ("SIPC") for a maximum coverage of $500,000 (with a cash sublimit of $250,000) and under Interactive Brokers LLC's excess SIPC policy with certain underwriters at Lloyd's of London 1 for up to an additional $30 million (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million.

 

[Ghost_of_Blotto]

You can obtain your own insurance through Lloyds against default by your firm and for valuable clients I've heard that the firm will meet some or the whole cost of the premium.

There are other considerations. For example it may be that letters of credit will fall to be treated differently (not form part of customer property) in the event of an FCM bankruptcy. (though this view is questionable it seems to be at least worth arguing in some circumstances) You are ranging over wide areas of complex and difficult law and it is well worth seeking specialist advice if you are anywhere near the point where it makes sense to consider this risk.

 

[rmorse]

Your concern is valid but this is typical and I would never rely on this insurance to protect my account. If you have a large account or you are a fiduciary for other's money, the best thing you can do is fund your account with short term US T-bills. SIPC treats securities differently than cash. It is much easier to move securities to another broker in a bankruptcy very quickly with cash to follow. Using T-bills will have a small cost on margin and a larger cost from lending to fund your positions. Again, I would only do this for very large accounts.

 

[freedinner]

My own guess is that maybe 5 billion USD of client assets at IB are above the SIPC limit. So the insurance of max. 150m is indeed insufficient.

Holding securities (stocks, bonds whatever) instead of cash would help your recovery rate a bit, but you'd still suffer losses as those securities are held in "street name", i.e. IB is registered as their owner, not you. You are a creditor to IB.

I have long argued with and asked IB to give clients the option (even a paid option) to register a security in their account in their own name, to completely eliminate any risk and any need for the expensive Lloyds insurance.

After the MF Global fiasco, when concern about our brokers was highest, I even started an IB feature poll, and many ETers voted on it. But IB turned us down, saying the solution would be too complex and unworkable.

https://www.interactivebrokers.com/en/?f=/en/general/poll/index.php?sid=7549

 

[freedinner]

This is what I wrote back then requesting this feature:
-------------------------------
At present, accounts above the SIPC limit (500k) are not fully protected in the event of a simultaneous IB bankruptcy and underfunding of segregated accounts versus claims, since the Lloyd's excess SIPC insurance is capped firmwide at 150m.

Even if this risk is remote, a customer has no control over it, while its impact - if it happened- could be severe.

As SIPC's first step is to return all stock registered in a customer's name regardless of the limit, there is an easy and cheap (for IB and us) way to insure against loss risk in this event:

Please give us the choice to register some or all of our shares in our names. This could for example be done by having a new column "Register shares in own name" alongside and similar to the "Liquidate last" column on the TWS account page.

IB could pass on register fees to customers. At the same time, this added protection would surely increase IB's competitive position against firms with worse platforms but with implicit government backing.

------------------------------------------
This is what IB replied:
------------------------------------------
We have investigated this suggestion and the solution is not as simple as adding a new column in TWS. The amount of documentation, inventory tracking and inventory management tasks it creates makes implementation unworkable.

 

[rmorse]

My own guess is that maybe 5 billion USD of client assets at IB are above the SIPC limit. So the insurance of max. 150m is indeed insufficient.

Holding securities (stocks, bonds whatever) instead of cash would help your recovery rate a bit, but you'd still suffer losses as those securities are held in "street name", i.e. IB is registered as their owner, not you. You are a creditor to IB.

I have long argued with and asked IB to give clients the option (even a paid option) to register a security in their account in their own name, to completely eliminate any risk and any need for the expensive Lloyds insurance.

After the MF Global fiasco, when concern about our brokers was highest, I even started an IB feature poll, and many ETers voted on it. But IB turned us down, saying the solution would be too complex and unworkable.

https://www.interactivebrokers.com/en/?f=/en/general/poll/index.php?sid=7549

To list stocks in your name, it would require a cash account. Any margin account will keep securities in street name, but there is a journal entry saying who owns these securities. I can't tell you it will never be an issue in the future, but through each bankruptcy in history that I'm a where of, securities have been moved to another firm very quickly. I can't name one firm where "customer" securities were lost in bankruptcy.

If you are that concerned, stick with brokers with no trading desk. Most of these large losses have been from firm trading not customer losses.

 

[helpme_please]

To list stocks in your name, it would require a cash account. Any margin account will keep securities in street name, but there is a journal entry saying who owns these securities. I can't tell you it will never be an issue in the future, but through each bankruptcy in history that I'm a where of, securities have been moved to another firm very quickly. I can't name one firm where "customer" securities were lost in bankruptcy.

If you are that concerned, stick with brokers with no trading desk. Most of these large losses have been from firm trading not customer losses.

Does IBKR have a trading desk that engages in proprietary trading? This makes me nervous.

I guess if financial crisis hits, one solution would be to simply buy money-market ETF or short-term bond ETF which are almost as good as cash. Seems like securities are easier to recover and lower risk compared to cash in the brokerage account.

Thanks for all the replies.

 

[def]

Does IBKR have a trading desk that engages in proprietary trading? This makes me nervous.

Thanks for all the replies.

Interactive Brokers LLC is a separate company and ring fenced from Timber Hill, a separate division that makes markets around the world. In other words, Timber Hill could go bust and it would not impact client assets of Interactive Brokers. Two items I'm posting from our site below. The first I'm posting because the firms employees and management own the majority of the company. We have a vested interest in running a conservative risk profile. The second addresses your question.

• IBG LLC's owners are our public company, Interactive Brokers Group, Inc. (14.5%) and the firm's employees and their affiliates (85.5%). Unlike at most other firms, where management owns a relatively small share, we participate substantially in the downside just as much as in the upside. Because of this vested interest, we run our business conservatively.
• We manage our brokerage and market making businesses in separate companies, which are registered with local securities and/or commodities regulators. We maintain strict systematic and procedural separation between the two business lines and we do not commingle or utilize customer-segregated assets for proprietary operations. Although certain affiliates of IB trade for their own account, our customer-facing businesses do not conduct proprietary trading.

 

[TZT]

Your concern is valid but this is typical and I would never rely on this insurance to protect my account. If you have a large account or you are a fiduciary for other's money, the best thing you can do is fund your account with short term US T-bills. SIPC treats securities differently than cash. It is much easier to move securities to another broker in a bankruptcy very quickly with cash to follow. Using T-bills will have a small cost on margin and a larger cost from lending to fund your positions. Again, I would only do this for very large accounts.

Great reply! An old-timer in CME taught me the same trick years ago, and I have been been doing this in my Interactive Brokers account. In fact, I think the cost might be zero for most futures traders. If you have a $10M account, and you put $9M into short term US T-bills for safety, you still have $1M to pay for the margin of your futures positions. So, there is no cost on margin (I assume any worthwhile margin algo would score T-Bills as virtually cash), and no need to borrow against your T-bills. [If you are going for high leverage, like holding $50M worth of futures, then the $1M cash won't be enough, and then there will be costs.]

 

[rmorse]

Great reply! An old-timer in CME taught me the same trick years ago, and I have been been doing this in my Interactive Brokers account. In fact, I think the cost might be zero for most futures traders. If you have a $10M account, and you put $9M into short term US T-bills for safety, you still have $1M to pay for the margin of your futures positions. So, there is no cost on margin (I assume any worthwhile margin algo would score T-Bills as virtually cash), and no need to borrow against your T-bills. [If you are going for high leverage, like holding $50M worth of futures, then the $1M cash won't be enough, and then there will be costs.]

I was referring to the procedure that SIPC goes through. To be honest, I'm not sure if offers more protection or not in a futures segregated account. I don't think it can hurt.

Bob