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

I think we -- customers of IB -- all appreciate the time and effort you have devoted to clearing up any concerns some have had. If you look back at me posts, you will see I was not concerned because the overwhelming portion of my IB account (except for some minor long term spreads) is SIPC guaranteed.

But I do want to take issue with the very first thing you have used to reassure your clients. The reason I take issue with it is that you know in terms of segregated futures' funds what you have said is far from the whole story and is there to reassure rather than inform. As you well know your firm or any other firm even when they are in strict compliance with every statute and rule still exposes your clients to some small -- tiny in IB's case -- risk because of the absurd nature of segregation as a concept.

You well know that futures' client funds are segregated as a class -- not individually -- and nothing inures that class (and hence the individuals that comprise it) from losing all or part of those funds through a variety of mishaps, sloppines (Lehman Brothers London debacle) and simple fraud at even a lower level than Sr. mgm't.

Please understand I am a huge fan of IB. Your strict margin requirements -- while a huge pain in the ass -- provide one mighty firewall protecting those seg funds and the pt 30 deposits as well. You guys clearly put an emphasis on security and internal controls. I think if, as and when it hits the fan you are among those that come out the other side in great shape.

I have no quibble with your firm except that I think you are wrong to gloss over that the statutes and regs systemically builds in risk. You guys have real muscle to back up your financial and counter part obligations. You can, and should, let your clients and everyone else know what a piece of crap the system and its regs really are. If you do, almost every futures trader with a brain will opt to "bank" with you even if they keep "small" money elsewhere to take advantage of the $500 RTH margins in the minis at other firms (I trade ES and I do it) and the reduced margins on other instruments.

Since you are guys are well positioned for the storm you need not be afraid to let people know that the system is quite poorly positioned and in the case of some clearing firms with many IB's grafted on to them downright rickety.

Again, just to be clear I have great respect for and confidence in your firm. I believe it is built to endure stress and ultimately stay the course.

Quote from IB-AN:

IB DOES NOT, in any way:

1. Circumvent U.S. securities or commodities rules at the expense of our customers;

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Quote from Chicago_CTA:

Go through the Customer Agreement of DORMAN TRADING in Chicago.

They do not hypothecate or re-hypothecate customer funds, apparently unlike RCG and RJO Brien. I did not realize RCG hypothecated funds.

I've been in the Dorman offices in Chicago. A sleepy but stable, family-owned enterprise which primarily serves local traders and those who trade professionally or somewhat professionally.

I recommend 'em.

Thanks for the clarification.


PM me if you need a contact there. No, I do not work for them, but clear through them as a customer.

-CTA
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yeah the offfice and people seem more like a home and a family than a biz
 
If the broker hypothecates securities vs. cash (e.g. stock loan or bank loan) the funds must be returned to the segregated reserve account. If they are hypothecated to a clearinghouse as margin collateral, they are maintained in a customer account at the clearinghouse.

Quote from western:

Here is a key question.

Lets say that a broker does re-hypo 140% of the assets and then for some reason the broker immediately declares bankrupcy.

Now you have assets that theoretically part of a customer's account at another firm.

Assuming all rules have been followed, are customer accounts still segregated? What happens to the re-hypo assets when a firm goes under?



I ask this because while I'm glad IB appears to be using only a small part of its re-hypo capacity, there is no guarantee that this won't change in the future, especially if IB itself ever faces a liquidity crunch.
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Quote from comintel:

I cannot find any reference to hypothecate or pledge in the account agreement for Cunningham Commodities/ Cunningham Futures Clearing.

It is a very simple account agreement and does not have anything like that at all.

Quote from Peternam:

They offer T4 . right ?
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That is correct.

CTS T4 is licensed via many other brokers and clearing firms as well but I find some advantages in having Cunningham themselves as the broker and clearing firm.

Since they do not want to compete with the other brokers and clearing firms they license T4 to, they do not advertise their own clearing firm and brokerage much, if at all.
 
I wouldn't trust any firm right now. Like they would tell you they are on the wrong side of a bad trade with your money. Of course they are going to tell you everything is fine until it's not.

The markets really didn't buy into Europe's "fix". I don't see countries giving up their soverignty. Might sound nice on paper. Imagine Canada trying to tell us how to run our house. Yeah right. With all fuss about German dominance I certainly don't see countries bowing to Germany's demands. I just don't see it happening. I think theres gonna be another attempt to push yields higher. If yields start to blow I would be wiring money out asap. NO checks. wire only. Better safe than sorry. I would go further and then move the money to a different account because if shit hits the fan they may try to retrieve it only to give you X cents on the dollar back.

I think I'm going to stick to options for awhile until we get some clarity.

There was a good article on Cnbc about herd behavior regarding banks and how they all take the same trades/risk to become "to big to fail" as a whole. You don't want to stray from the pack or they will let you go under.

It really doesn't apply to the MF's out there for the most part but if the same trade/risk herd mentaility is the same there may be another MF looming out there.
 
Most of ib's assets are options and to my knowledge there is no margin hypothecation or re hypothecation with a majority of assets on their book.
 
Quote from Ghost of Cutten:



For further risk control, you can set a stock price alert to give you warning of any impending problems, then wire out on the first sign of trouble.
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Sorry, not good enough.
MF "clawed back" money that was wired out prior to bankruptcy from some customers. Just another of those things we didn't know was possible.
 
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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Good Grief! Nobody here is getting upset about hypothecation!

It's RE-hypothecation that we've just learned about. And you, who are asking us if we even know what hypothecation is, apparently don't know the difference!

Good grief!
 
Quote from mike oxbig:

Good Grief! Nobody here is getting upset about hypothecation!

It's RE-hypothecation that we've just learned about. And you, who are asking us if we even know what hypothecation is, apparently don't know the difference!

Good grief!
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It looks as if, despite the Reuters article, the normal meaning of re-hypothecation is just hypothecation involving a third party lender as well as the customer and the broker.

So they do amount to essentially the same thing in the way IB or most brokers operate.
 
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