InteractiveBrokers "hyper-hypothecates" $14.5b of Customer Funds?

[tshirtdeal]

Wanted to just say thanks to Zboy for the help... Also Steve, the reason for this thread is due to the recent article which puts IB using the same loophole techniques as MFG which caused the loss of segregated client accounts...

 

[ammo]

Quote from apex82:

Yes 10k here and there is easy to spread out and feel safe. Try taking 10 mill that takes about 200 trades a day and is usually 50% invested at all times and doing the same thing... not so easy now. Anyone know of some other brokers that dont seem to be involved in this re-hypothecate stuff. Any other avenues discovered other than spreading out below SIPC limit? Outside insurance etc?

talk to swanny and open your own boutique,clear your trades for exchange fees

 

[Ghost of Cutten]

Quote from denner:

The concept of raising commissions/costs 10-fold would most likely drive all the customer traffic elsewhere. Instead, clients would just pare down their exposure to the bare minimum and operate per usual at the low cost provider.

It's also not written in stone that if an FCM were to raise these costs 10-fold that they would then stop playing fast and loose with the loopholes. Instead, it would more than likely incentivize them to really push the envelope of firm profitability. We are talking about the financial industry where any nook and cranny is explored to make another buck.

I'll repeat it until I'm blue in the face. It's ZIRP, stupid.

No one has suggest raising commissions 10-fold. I only said that I personally would rather pay even 10 times more per round trip rather than risk losing 100% of funds - that doesn't mean I think it's a good idea to raise commissions to that rate. So, you might as well just ignore that comment.

My point is simply that, due to widespread concern over credit risk in the wake of the failure to protect segregated funds, there will be ample demand for accounts offering very low credit risk, even at the cost of somewhat higher commissions. Brokers should start providing these accounts, so that people who wish can trade and pay a fair market rate for secure trading, instead of being subsidised with lower commissions that are funded solely by brokers exposing them to 100% loss of capital.

 

[Ghost of Cutten]

Quote from drukes1234:

.... still don't understand the concern if you trade equities. You're SIPC insured.

Lol. Check out the MF GLobal thread - *before* they went under, people were saying "I'm not concerned, my funds are in a segregated account." 2 weeks later, their money was gone.

It's extremely naive to rely fully on insurance and regulation. All they do is reduce risk, they don't eliminate it entirely. It is quite possible for legal bollocks, insurance failure/underfunding, regulatory change, or government force majeure actions to render any insurance or regulatory protection useless.

A proper trader mentality is to always assume protections can fail, and to have multiple measures in place, so that if one fails, you have a chance to avoid being totally screwed. It is naive and foolhardy to rely on a single line of defence.

 

[MYDemaray]

Maybe this was already covered earlier in the thread...I don't have the patience to dig through 20 pages. But comparing IB's balance sheet with MF Global's, I get:

MF Global - $18B in repo liabilities / $1.4B in equity = 12.85x
Total assets / equity = 32.8x

Interactive Brokers - $8.4B in repo liabilities / $4.6B in equity = 1.83x
Total assets/equity = 8.3x

Not quite the same leverage picture.

 

[ajcrshr]

Quote from MYDemaray:

Maybe this was already covered earlier in the thread...I don't have the patience to dig through 20 pages. But comparing IB's balance sheet with MF Global's, I get:

MF Global - $18B in repo liabilities / $1.4B in equity = 12.85x
Total assets / equity = 32.8x

Interactive Brokers - $8.4B in repo liabilities / $4.6B in equity = 1.83x
Total assets/equity = 8.3x

Not quite the same leverage picture.

From what I understand it seems almost impossible the determine actual leverage.
from the Reuters article:

As well as collateral risk, re-hypothecation creates significant counterparty risk and its off-balance sheet treatment contains many hidden nasties. Even without circumventing U.S. limits on re-hypothecation, the off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering.

Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements. What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again. Essentially, it is a chain of debt obligations that is only as strong as its weakest link.

 

[trading spaces]

Quote from MYDemaray:

Maybe this was already covered earlier in the thread...I don't have the patience to dig through 20 pages. But comparing IB's balance sheet with MF Global's, I get:

MF Global - $18B in repo liabilities / $1.4B in equity = 12.85x
Total assets / equity = 32.8x

Interactive Brokers - $8.4B in repo liabilities / $4.6B in equity = 1.83x
Total assets/equity = 8.3x

Not quite the same leverage picture.

So where does the article and thread heading get the $14.5bn figure from?

 

[MYDemaray]

Trying to find that out. Looking into IB's statement of financial position as of June 30, 2011. Looking at Footnote 11:

http://institutions.interactivebrokers.com/download/IBLLC_2Q2011_Unaud_Finls.pdf

At June 30, 2011, the fair value of securities received as collateral, where
the Company is permitted to sell or repledge the securities was $16,817,859,287, consisting of
$13,022,386,422 from customers, $2,886,934,605 from securities purchased under agreements to
resell and $908,538,260 from securities borrowed. The fair value of these securities that had been
sold or repledged was $4,526,153,369, consisting of $2,583,920,633 deposited in a separate bank
account for the exclusive benefit of customers in accordance with SEC Rule 15c3-3, $761,740,278
securities loaned, $877,478,486 securities borrowed that had been pledged to cover customer short
sales and $303,013,972 securities that had been pledged as collateral with clearing organizations.

Similar language from the MF Global 10-K, Note 3:
http://www.sec.gov/Archives/edgar/data/1401106/000119312511145663/d10k.htm#tx172225_11

The Company retains the right to re-pledge collateral received in collateralized financing transactions. As of March 31, 2011, the market value of collateral received under resale agreements was $48,665,649, of which $256,288 was deposited as margin with clearing organizations. As of March 31, 2010, the market value of collateral received under resale agreements was $68,958,618, of which $199,599 was deposited as margin with clearing organizations. The collateral is valued daily and the Company may require counterparties to deposit additional collateral or return collateral pledged, as appropriate. As of March 31, 2011 and 2010, the market value of collateral pledged under repurchase agreements was $61,088,346 and $75,606,222, respectively. As of March 31, 2011 and 2010, there were no amounts at risk under repurchase agreements or resale agreements that are accounted for as collateralized financing transactions with a counterparty greater than 10% of Equity.

So, if I'm reading this correctly, IB could have pledged up to $16.8B, but it only had $4.5B pledged as of June 30th. Compare that to MF Global where they received $48.7B in collateral, but had pledged $61B in repos. Again, as of the dates of these figures, IB had $4.5B in total equity versus $1.4B for MF Global. You can see the massive leverage differential.

Perhaps the $14.5B number in the article was a reference to the amount IB is permited to repledge.

 

[Random.Capital]

I thought we learned from the Enron days that if the financial statements don't make it immediately clear, something is "not right", by definition.

Nobody should be having to work this hard to decipher what is happening. That's just a bad bad sign.

IMO.

 

[Nick29]

The problem is you have to rely on the CEO not going haywire at some point in the future.