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

Quote from lwlee:

According to Jefferies’ most recent Annual Report it had re-hypothecated $22.3 billion (in fair value) of assets in 2011 including government debt, asset backed securities, derivatives and corporate equity- that’s just $15 billion shy of Jefferies total on balance sheet assets of $37 billion.

I wonder what the Jefferies' CEO has to say now. They were banging on the drums really hard, saying how they were not like the rest and that the evil-doers were out to get them.
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I doubt if its black and white.. ie. all re-hypothecation is bad .. there must be a legit reason why the regulators allow it.

"U.S. Federal Reserve Board's Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client's liability to the prime broker"

Of course any of these firms may or may not be bending the rules to breaking point like MF. We dont really know.

According to the OP article IB 'hyper-hypothecates' $14 billion, assuming that figure is correct then that is alot, but IB also have something like 30billion in customer assets i think. So i doubt $14billion exceeds the 140% quoted in the regulations.
 
So one re-hypothecation analogy would be that if I took out a mortgage, the bank could borrow money based on the hypothetical ownership (or right to take posession) of my home? That's ... wtf?

Then they can re-hyopthecate 140% of that borrowed money and so each link in the chain increases the amount by 140%. Money out of thin air, and also off-balance sheet. Wow, that's nice.

U.S. banks direct holding of sovereign debt is hardly negligible. According to the Bank for International Settlements (BIS), U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. If we factor in off-balance sheet transactions such as re-hypothecations and repos, then the picture becomes frightening.
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So we can assume that the US banks really hold around $724 billion of GIIPS debt? Or what.


I think the regulators have no clue how these loopholes can and are being used. They can get pretty complex pretty fast. They allow it because they don't get it. Not because it's "ok".
 
Quote from southall:



According to the OP article IB 'hyper-hypothecates' $14 billion, assuming that figure is correct then that is alot, but IB also have something like 30billion in customer assets i think. So i doubt $14billion exceeds the 140% quoted in the regulations.
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How can we know? We don't know the value of customer collateral or it's proportion to the 30bn. It could very well be above 140%. They have a UK operation don't they? What do you think they use it for?

The way I see it is that a lot of the collateral will come from longer term and mid term investors at IB. If they start pulling out en masse, then the danger of re-hypothecation is going to get real for the rest of us.
 
Quote from braincell:

How can we know? We don't know the value of customer collateral or it's proportion to the 30bn. It could very well be above 140%. They have a UK operation don't they? What do you think they use it for?

The way I see it is that a lot of the collateral will come from longer term investors at IB. If they start pulling out en masse, then the danger of re-hypothecation is going to get real for the rest of us.
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Of course we need to know the exact amount IB do.
The OP article says 14.5b.

This may underestimate or overestimate the real figure.
But i would be a lot more alarmed if the article said IB has being doing this to the tune of say $50billion.
 
If it is legitimate it shouldn't be mysterious. It should be transparent.
Surely it can be detected somewhere in the financial statements.
 
You cannot trust any firm, especially one in the finance industry. I'm setting an alert for IBKR, if it breaks 10 - I'm withdrawing all my money.
 
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