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

[mike oxbig]

Quote from comintel:

Not necessarily at all.

All it means in the normal case is financing of margin loans using a lender. I think that every stock broker does this and that is an essential and normal part of stock margining.

How else is the broker going to finance margin loans other than by pledging the customer's stock to the firm that is doing the financing?

Maybe the same way that a bank lends money for mortgage loans.

Have you ever heard of a bank going down and then find out that people no longer have the houses they were living in because the homes were used as collateral and they are now taken away from the homeowners? Of course not. So why do you think it should be different for a broker? It shouldn't.

There is no way that my assets should be at risk when my brokerage company needs a loan.

 

[Daal]

Quote from mike oxbig:

What we are being asked to believe from IB is that "yes, we use your assets as collateral for our loans, but don't worry, because we promise that we won't make any huge Eurozone bets like MF did, so everything is ok."

If anybody is comfortable with that, then i submit that you are simply not thinking clearly.

If the IB guy is correct and they are only using 6% of their pledging capacity then there is very little risk on their hypothecation. Their equity is several times that 6%
A far bigger risk in my view is some kind of black swan leading to a severe loss on Timber Hill which would be bailed out by taking seg funds

 

[Cheese]

The issue of holders using the margin funds of clients is generating a lot of hot air.

The reasonable and only course of action is to ask (and to keep asking) the federal government and the regulatory authorities to end any use of segregated funds outside holding them intact with a bank and beyond any risk of loss. And I agree that this must to be done.

 

[comintel]

Quote from mike oxbig:

Maybe the same way that a bank lends money for mortgage loans.

Have you ever heard of a bank going down and then find out that people no longer have the houses they were living in because the homes were used as collateral and they are now taken away from the homeowners? Of course not. So why do you think it should be different for a broker? It shouldn't.

There is no way that my assets should be at risk when my brokerage company needs a loan.

When the bank lends you money on your house, it also re-hypothecates your house when it obtains money from a superior lender.

That is, it passes along the security for the mortgage to the ultimate lender.

I am *not* defending the practice *alleged* in the Reuters article of repledging customer assets to obtain loans for use by *some* brokers in their own trading or otherwise in their own business.

That is *not* what IB is doing. They are merely obtaining a margin loan for you from a third party (at below 2% interest rate by the way).

Whenever any sort of collateralized loan is made, in any industry, the property is always re-pledged as the secured loan is re-sold or re-financed.

That is the normal meaning of re-hypothecation and that is the reason it is in every margin loan agreement of every stock broker.

Now, some completely improper use of re-hypothecation is alleged in the Reuters article on the part of some brokers. There is absolutely *no* reason to think this applies to IB.

 

[mike oxbig]

Quote from comintel:

When the bank lends you money on your house, it also re-hypothecates your house when it obtains money from a superior lender.

That is, it passes along the security for the mortgage to the ultimate lender.

I am *not* defending the practice *alleged* in the Reuters article of repledging customer assets to obtain loans for use by *some* brokers in their own trading or otherwise in their own business.

That is *not* what IB is doing. They are merely obtaining a margin loan for you from a third party (at below 2% interest rate by the way).

Whenever any sort of collateralized loan is made, in any industry, the property is always re-pledged as the secured loan is re-sold or re-financed.

That is the normal meaning of re-hypothecation and that is the reason it is in every margin loan agreement of every stock broker.

Now, some completely improper use of re-hypothecation is alleged in the Reuters article on the part of some brokers. There is absolutely *no* reason to think this applies to IB.

?
When a bank goes down, people don't get thrown out of their house when another bank takes over. Ok?

What is so hard to understand about that?

 

[def]

Mike Oxbig,

All I know is that we do things right and have built a reputation over the years of being fiscally conservative with our business model. My first post was a reaction to some of the comments which are accusing us of doing things we simply do not do. IB-AN spelled things out clearly, pointed to where you can look on our balance sheets and I would have thought addressed the concerns posted on this board and pointed out the inaccuaracies in the article. Do keep in mind that the people behind these articles may not have a full grasp of the subject and gain readership by crying the sky is falling. I know that the psyche of the market has changed and with MF going down there is a huge loss of creditability in the market. All we can do from our side is try to be as open as possible and back our words with action. With that, I'd like to point out that we don't charge excessive margin, don't take excessive markups on interest rates and all this is reflected in our financials. We believe that we are one of the most secure and financially strong broker/dealers in the business and even before floating 10% of the company, openly published our brokerage financials. As a result, we've been able to gain the trust from many accounts - both large and small - who after doing their due diligence believe we are a safe custodian of their assets. I don't see our model changing and am also comfortable with the knowledge that senior management have a large chunk of their personal net worth tied up in the company.

I would have thought there would be kudos given to IB-AN for the detailed response to the article but given what's gone on in the markets, I can understand the skepticism. From my standpoint, at least we're being open and trying to address your concern and whether you use IB or not, I hope you ask the same questions and/or do the same amount of D/D on whomever you choose.

 

[Optionpro007]

Def,

Thank you and IB-AN for clarifying your financial position regarding this subject.

Kudos to you.

 

[mike oxbig]

Quote from def:

Mike Oxbig,

All I know is that we do things right and have built a reputation over the years of being fiscally conservative with our business model. My first post was a reaction to some of the comments which are accusing us of doing things we simply do not do. IB-AN spelled things out clearly, pointed to where you can look on our balance sheets and I would have thought addressed the concerns posted on this board and pointed out the inaccuaracies in the article. Do keep in mind that the people behind these articles may not have a full grasp of the subject and gain readership by crying the sky is falling. I know that the psyche of the market has changed and with MF going down there is a huge loss of creditability in the market. All we can do from our side is try to be as open as possible and back our words with action. With that, I'd like to point out that we don't charge excessive margin, don't take excessive markups on interest rates and all this is reflected in our financials. We believe that we are one of the most secure and financially strong broker/dealers in the business and even before floating 10% of the company, openly published our brokerage financials. As a result, we've been able to gain the trust from many accounts - both large and small - who after doing their due diligence believe we are a safe custodian of their assets. I don't see our model changing and am also comfortable with the knowledge that senior management have a large chunk of their personal net worth tied up in the company.

I would have thought there would be kudos given to IB-AN for the detailed response to the article but given what's gone on in the markets, I can understand the skepticism. From my standpoint, at least we're being open and trying to address your concern and whether you use IB or not, I hope you ask the same questions and/or do the same amount of D/D on whomever you choose.

Ever since I, or anyone else even thought about trading futures, we've been told that our funds were "segregated". The purpose being that our funds were kept separate from the brokerage firms so as to provide a level of safety for us. Is there anything wrong with what i've said so far?

Now, we find out that the term "segregated", as in 'segregated funds' means ABSOLUTELY NOTHING. NOTHING AT ALL! Because you, and most other brokers, can simply borrow against these "segregated funds" and if you don't pay off, our "segregated funds" are taken from us. Do you not understand that this means the term "segregated funds" is a meaningless non sequitur. It provides NO SAFETY AT ALL. See?

And you want me to give you kudos?

Sorry, but i can't.

 

[def]

Quote from mike oxbig:

Ever since I, or anyone else even thought about trading futures, we've been told that our funds were "segregated". The purpose being that our funds were kept separate from the brokerage firms so as to provide a level of safety for us. Is there anything wrong with what i've said so far?

Now, we find out that the term "segregated", as in 'segregated funds' means ABSOLUTELY NOTHING. NOTHING AT ALL! Because you, and most other brokers, can simply borrow against these "segregated funds" and if you don't pay off, our "segregated funds" are taken from us. Do you not understand that this means the term "segregated funds" is a meaningless non sequitur. It provides NO SAFETY AT ALL. See?

And you want me to give you kudos?

Sorry, but i can't.

I think your comment is inaccurate and the best I can do here is repost what was posted by IB-AN.

"More specifically, regarding hypothecation and the level of such activity at IB:

- The hypothecation and re-hypothecation of customer assets is a standard and essential practice, which U.S. brokers employ in the course of financing customer activity. The rights to do so are longstanding, have been explicitly provided by regulation and one should not be surprised to see boilerplate consent language in each broker’s customer agreement acknowledging this. For example, a customer who incurs a margin debit by virtue of the fact that they have purchased securities with only partly their own money, thereby relying upon the broker to lend them the funds to pay the balance at settlement, subjects a portion (up to 140% of the amount borrowed, also referred to as the margin debit) of those securities to a lien on behalf of the broker. The lien is also known as hypothecation. The broker, in turn, may pledge or re-hypothecate the securities upon which they have a lien to replace the cash. In the case of IB, this re-hypothecation typically takes place in the form of a stock loan. In simple terms, IB borrows money from a third party, using the customer’s margin stock as collateral, and it lends those funds to the customer to finance the customer’s purchase.

- Similarly, a customer who carries a futures position must place a margin deposit with IB. IB may pledge the customer’s cash deposit to a futures clearing house in support of the margin required on that position.

- While IB is not in a position to comment on the practices of others and whether they comply or fail to comply with these regulations, or do so in a manner which introduces unwarranted risk to the firm and its customers, we can state unequivocally that we comply with all regulations and utilize investment policies that tend to be more conservative than those permitted under the regulations.
"

I think these comments are straight forward and clear.

 

[FKY]

DEF and IB_AN

Thanks for your explanations but to solve the 'loss of faith' issue, not in your company but loss of faith in the system. There is a simple solution that has been proposed on your own web site.

that is to register shares in 'client name' rather than 'street name'

This would give not only me but a lot of others like me, a better sense of security and also help you keep traders' assets otherwise traders are going to move assets to a safer place, and only hold with brokers what they are prepared to loose.

Why is it so difficult for you to do Direct Registration and pass on the costs to the client? The costs and effort to do are minimal, what is your excuse for not doing this?

I'd like to point to the link where
IB CUSTOMERS: can vote on feature poll 7549 which would provide an inexpensive way to insure up to 100 percent account security even for large accounts by giving the customer the option to hold all or part of his shareholdings in "customer name" instead of "street name".

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