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

I'm going to go a step further here. Futures traders have been told since the beginning of trading time, that "segregated funds" meant that our funds were protected from the brokerage firm being able to spend our funds on its own business.

Now, we find out, quite contrary to that, the brokerage firms are placing our 'segregated funds' at risk to use in their own business. It was hidden in legaleze type language that almost nobody realized, that allowed them to simply borrow against our 'segregated funds' and do with the proceeds whatever they wished.

Seeing as how almost everyone was relying on the impression being given that our funds were 'set apart and safe' when it was no so and hidden (to most everybody), i see no alternative other than to call it a great big fraud and scam.

Defend this practice of rehypothecation of 'segregated funds' if you can.
 
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.
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I am thankful that you and IB-AN have made in depth replies to the issues at hand and they have alleviated some of my concerns.

But you and senior managment at IB should also be aware that the financial world is now different after the MF Global failure. Trust is gone and any firm that is not too big too fail is vulnerable.

If IB's stock price were to ever drop into single digits or have a sudden big one day decline for ANY reason, people are going to panic and start pulling out funds. I hope you guys are prepared for this scenario.
 
Quote from def:

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.
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Once again, you are attempting to convince us that "even though we have access to your segregated funds by borrowing against them, would never, ever do anything to cause you to lose them. Trust us."

If you really wanted us to trust you, you would have made it explicit and up front from the beginning that you had access to our funds by borrowing against them. I suppose right about now you are saying to yourself "why didn't he read the contract?"

Well, seeing as how virtually no-one that i know of in the trading community knew what rehypothecation was or the risks it inflicted upon us, I would say that "why didn't you read the contract" is a pretty flimsy argument. Especially since everyone in the industry HAS been relying on the term "segregated funds".
 
Any business model that allows the firm to at anytime "play around" with customers funds is a broken model in my opinion.

Run away from that model and fast.
 
As an IB client, I appreciate def and IB-AN's responses. But perhaps the better question one or both of you can answer (to keep things really simple) is:

What is the difference between re-hypothecation, which as you have admitted IB does engage in, and what MF Global did that ended up losing their clients' funds? Is the difference between what IB does and what MF did simply the degree to which MF Global was levered up? Or were the MF Global losses not a result of re-hypothecation, but something else?
 
Quote from mike oxbig:

Once again, you are attempting to convince us that "even though we have access to your segregated funds by borrowing against them, would never, ever do anything to cause you to lose them. Trust us."

If you really wanted us to trust you, you would have made it explicit and up front from the beginning that you had access to our funds by borrowing against them. I suppose right about now you are saying to yourself "why didn't he read the contract?"

Well, seeing as how virtually no-one that i know of in the trading community knew what rehypothecation was or the risks it inflicted upon us, I would say that "why didn't you read the contract" is a pretty flimsy argument. Especially since everyone in the industry HAS been relying on the term "segregated funds".
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Mike, I am with IB... and a LOT of my friends are with IB and we are not feeling secure... and we are NOT happy with these answers...

We appreciate you aggressively 'going' after the truth here...

thank you... :) :)

I hope the rest of IB-AN's will join in ... 'Full Boat'... until we get EXACT clarification...

IB is missing the Gold at the End of The Rainbow here... If they were to become the ONLY Brokerage Firm to Halt ReCrap... their Biz and customers could grow exponentialy over the next few years...

Wake up IB and smell the Defaults... :confused:
 
Quote from EdgeHunter:


IB is missing the Gold at the End of The Rainbow here... If they were to become the ONLY Brokerage Firm to Halt ReCrap... their Biz and customers could grow exponentialy over the next few years...

Wake up IB and smell the Defaults... :confused: [/B]
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Now you mention gold you have my full attention o.t cannot re-hypo gold can you.

there is one simple step that IBKR could take to make it feel safer and grow customer base exponentially, that is to allow optional Direct Registration of shares. Then in event of black swan event it should be easier to see what belongs to who. Or in the unlikely event something sinister is up, alarm bells will ring at the Registrar if there is a massive change from client name back to street name.

Now will IBKR allow Direct Registration or not? if not what is the excuse for not doing it?
That is the question.
 
What are the chances right now that those that lost money in the MF scandal will never see their money back?

Based on the things Ive read, it's looking pretty grey but Im not up to date on the topic.

This would be very sad, to lose money like that, very sad

Fon
 
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