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

That's a pretty unimpressive post, Def. Given what just happened at MF, and the general lack of transparency in this business, it is natural people are concerned. Disparaging them is just going to raise suspicions further, because that isn't the action of a confident, "right" organization.

I wasn't particularly concerned before, really, but after reading your response, now I am.
 
Quote from def:

Wow - pretty serious accusations here but how many of you really understand what hypothecation is? This is all about margin and stock loan. Remove the ability to hypothecate and you might as well suck out a massive amount of liquidity from the system.

First, let me get this out of the way. The accusations or assumptions that IB client money is used to fund Timber Hill are completely false. The companies are separate.

Client money is segregated. However, if you utilize margin and are long shares, IB can lend some of those shares out to others. These are not risky loans as there are limits on how much can be lent and they can be recalled at anytime and marked to market real time. Those are the rules, they are fair, not risky and add a ton of liquidity into the system.

The comments and fears presented here are a classic over-reaction to margin lending. Do not put IB or other firms on the same plate as MF. IB has a very strict policy when it comes to margin and deficits (ie. real time liquidations) and a very conservative risk management and investment policy. Many clients scream that they want more margin and that the stock loan list isn't long enough and now many of you are calling the kettle black. Before believing everything you read, do your homework and then decide if the practice is risky. Some banks are silly when it comes to greed and what they lend out. Others are not. IB has a long history of being conservative and risk adverse. Our large capital base and handling of client credit should also provide additional comfort. Many of the comments and assumptions on this thread are baseless.

Let's not over-react and create fear where their should be none - and I say this in regards to the comments on the other firms mentioned in this thread as well.

I need to put in a days work now so do not expect any replies for quite some time from me. I agree this is something that needs further clarification so you can be better educated on the subject as well as placate the unfounded fears expressed here. However, this this discussion should be for the industry and not single out IB.
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Thanks for providing clarity Def. On a sidenote if you ever know IB is about to go under can you kindly give us here at Elitetrader a heads up. Cheers.
 
Quote from def:

Wow - pretty serious accusations here but how many of you really understand what hypothecation is? This is all about margin and stock loan. Remove the ability to hypothecate and you might as well suck out a massive amount of liquidity from the system.

First, let me get this out of the way. The accusations or assumptions that IB client money is used to fund Timber Hill are completely false. The companies are separate.

Client money is segregated. However, if you utilize margin and are long shares, IB can lend some of those shares out to others. These are not risky loans as there are limits on how much can be lent and they can be recalled at anytime and marked to market real time. Those are the rules, they are fair, not risky and add a ton of liquidity into the system.

The comments and fears presented here are a classic over-reaction to margin lending. Do not put IB or other firms on the same plate as MF. IB has a very strict policy when it comes to margin and deficits (ie. real time liquidations) and a very conservative risk management and investment policy. Many clients scream that they want more margin and that the stock loan list isn't long enough and now many of you are calling the kettle black. Before believing everything you read, do your homework and then decide if the practice is risky. Some banks are silly when it comes to greed and what they lend out. Others are not. IB has a long history of being conservative and risk adverse. Our large capital base and handling of client credit should also provide additional comfort. Many of the comments and assumptions on this thread are baseless.

Let's not over-react and create fear where their should be none - and I say this in regards to the comments on the other firms mentioned in this thread as well.

I need to put in a days work now so do not expect any replies for quite some time from me. I agree this is something that needs further clarification so you can be better educated on the subject as well as placate the unfounded fears expressed here. However, this this discussion should be for the industry and not single out IB.
More...

Thanks for replying Def. The margin lending you described appears to be standard hypothecation, which I am totally ok with.

But it is re-hypothecation that I am concerned with. I found this definition on the web.

"Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowings."

Can you confirm that IB does not do this?
 
Quote from western:

Thanks for replying Def. The margin lending you described appears to be standard hypothecation, which I am totally ok with.

But it is re-hypothecation that I am concerned with. I found this definition on the web.

"Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowings."

Can you confirm that IB does not do this?
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IB's customer agreement does allow re-hypothecation as well as hypothecation:

Interactive or its Affiliates may deposit collateral, securities and/or other Customer property with third parties and may pledge, re-pledge, hypothecate or re-hypothecate Customer collateral, securities and/or other Customer property, either separately or together with other securities and/or other property of other Customers of Interactive for any amount due to Interactive in any Interactive Fully-Disclosed Account in which Customer has an interest
 
"Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowings."


That definition may be inaccurate.

http://financial-dictionary.thefreedictionary.com/Rehypothecate

says:

rehypothecate

"To repledge stock as collateral for a loan. In practice, this term means to pledge securities (by a brokerage firm) for a bank loan when the securities have already been pledged to the firm by one of its customers. The brokerage firm essentially passes along the collateral in order to obtain a loan to finance the customer's account."


This may be a better definition and be normal.

In other words, there may be a perfectly good form of re-hypothecation involved in obtaining financing for a margin loan. Naturally the security for that loan has to be passed on to any third party who finances the loan. Hence the "re-".
 
if you want to compete and stay in biz,you need to go with the flow, whatever the flow is,if you are big( i.e..IB..that;s my story ,i'm sticking with it,signing off now)you have no choice if you want to stay competitive..if it sounds too good to be true..
 
Rehypothecation is a practice that occurs principally in the financial markets, where a bank or other broker-dealer reuses the collateral pledged by its clients as collateral for its own borrowing.
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Well, this kinda obliterates the possibility of "segregated funds." Funds are not segregated if they can be used as collateral for the firm's borrowing, or? What am I missing here...
 
Quote from short&naked:

Well, this kinda obliterates the possibility of "segregated funds." Funds are not segregated if they can be used as collateral for the firm's borrowing, or? What am I missing here...
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Looks that way to me, (futures accounts & margin accounts) if in accordance with regulations.
 
Quote from thesniper:

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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I like that strategy, my alarm is now set :)
 
I agree with def's post and think that IB is one of the better guys out there when looking out for client funds.

However, this is the problem with ALL the financial firms right now - they'll all be saying the same thing, ie "we're good, we're not like the others, you can trust us, honest!"

But I bet if you'd have emailed MF 6 months ago they would have said the exactly the same thing, ie 'we're safe, we're not a crazy bank, our risk management systems are robust and some of the best in the business, your funds are segregated etc etc etc'.

Look at the corporate cliches on EVERY financial firms website, they all say the same crap. For example, one of ';Goldman's 10 commandments is 'our clients always come first' A sick joke if ever there was one.......
 
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