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

[Soph]

What is disconcerting wrt to IB's handling of funds, and its lack of transparency of same, is the statement in theeir client services agreement wherein THEY, or any of THEIR AFFILIATES, can re-hypothecate client assets.

That's the bomb. Those conditions all for the possibility of hyper-hypothecation of client funds (North American based, or otherwise) via their UK offices.

Since they have made a point of allowing themselves to do this vie the customer agreement, I MUST assume that is exactly what they are doing until they provide explicit proof otherwise. That is the issue in a nutshell imo.

I have a question on this matter before IB currently. The outcome, fortunately, provides two very simple paths. 1) I'm provided all the evidence needed to determine that they ar ein fact risk-averse and not re-hypothecating or hyper-hypothecating via their affiliates (admittedly very unlikely), or 2) I simply close my accounts while I search for a more appropriate, risk averse broker.

That is the only positive of all this. Its a very easy problem to solve.

 

[comintel]

Quote from Soph:

What is disconcerting wrt to IB's handling of funds, and its lack of transparency of same, is the statement in theeir client services agreement wherein THEY, or any of THEIR AFFILIATES, can re-hypothecate client assets.

That's the bomb. Those conditions all for the possibility of hyper-hypothecation of client funds (North American based, or otherwise) via their UK offices.

Since they have made a point of allowing themselves to do this vie the customer agreement, I MUST assume that is exactly what they are doing until they provide explicit proof otherwise. That is the issue in a nutshell imo.

I have a question on this matter before IB currently. The outcome, fortunately, provides two very simple paths. 1) I'm provided all the evidence needed to determine that they ar ein fact risk-averse and not re-hypothecating or hyper-hypothecating via their affiliates (admittedly very unlikely), or 2) I simply close my accounts while I search for a more appropriate, risk averse broker.

That is the only positive of all this. Its a very easy problem to solve.

Wasn't this addressed when IB posted:

"To start, and so as not to leave any confusion as to the position of IB vis-à-vis the Thomson Reuters news article, IB DOES NOT, in any way:

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

2. Invest customers’ segregated funds in foreign sovereign debt or utilize in-house repurchase agreements;

3. Commingle or utilize customer segregated assets for proprietary operations;

4. Enter into agreements which are designed to take advantage of supposedly unrestricted U.K. re-hypothecation rules; or

5. Engage in transactions deemed as “hyper-hypothecation”.

 

[Nick29]

There was a earlier post saying Dorman Trading did not re-hypothecate.
Well they have the exact same provision as well:

http://www.dormanfutures.net/forms/indiv.pdf

"Subject to such segregation requirements, Customer hereby
grants to Dorman the right to pledge, repledge,
hypothecate, rehypothecate, or invest, either
separately or with the property of other customers,
any securities or other property held by Dorman for
the accounts of Customer or as collateral therefore,
including without limitation to any exchange or
clearing house through which trades of Customer are
executed. Dorman shall be under no obligation to
pay to Customer or account for any interest, income
or benefit derived from such property and funds or
to deliver the same securities or other property
deposited with or received by Dorman for the
account of Customer. Dorman may deliver securities
or other property of like or equivalent kind or
amount."


So even a "sleepy family run business" can be a re hypothecator.

 

[ammo]

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 t

- 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.

it would be best if the diff between futures and equities money was erased and IB came out and said ,even though we can legally use your money ,due to a loophole, we think it's unethical and never partake in such practices,and we and several other houses are working feverishly with DC to have the loophole closed as it only serves the least ethical in our business and tarnishes the rest of the industry as a whole

 

[Nick29]

Out of Dorman, Interactive, MF Global, MFG's re hypothecation provision looks way more sinister:

MFG: 7. Consent To Loan Or PledgeYou hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate,loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.

IB: 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

Dorman: Subject to such segregation requirements, Customer hereby
grants to Dorman the right to pledge, repledge,
hypothecate, rehypothecate, or invest, either
separately or with the property of other customers,
any securities or other property held by Dorman for
the accounts of Customer or as collateral therefore,
including without limitation to any exchange or
clearing house through which trades of Customer are
executed. Dorman shall be under no obligation to
pay to Customer or account for any interest, income
or benefit derived from such property and funds or
to deliver the same securities or other property
deposited with or received by Dorman for the
account of Customer. Dorman may deliver securities
or other property of like or equivalent kind or
amount

 

[Jreality]

FWIW, I've had an IB account since sometime in 2010. I never dip into my margin, and haven't done so the whole time I've had the account. My cash balance was always positive in the statement of funds, and I never borrowed any stock. However, I have received payments in lieu of dividends from time to time (happened 7 times this year) although the payments are small (< $5) due to small position sizes. When I pointed out that I always had free cash and that I didn't borrow stock, this was the response I got:

_____________________________________________
Please be advised that IB would not loan your stock if the account does not have a margin loan. With that being said, the segregation is performed on a net basis. As such, it is possible to have a technical segregation deficiency due to matters outside the broker's control, such as fail to deliver or an increase in segregation requirement for accounts that were previously borrowing funds. When these types of situations occur and shares cannot be secured, a Payment in Lieu will take place.
_________________________________________________

I like IB, and they seem like a good brokerage, but I'm wondering if this particular issue is any reason to be concerned?

 

[Options12]

Quote from IB-AN:

If you refer to the balance sheet, you'll note that customer receivables (e.g., margin debits) total $9.31 billion which at 140% total approximately $13.0 billion. You are correct in that we do don't fully utilize this capacity.

So the amount in the customer "Reserve Bank Account" at IB based on the June 30 filing was roughly 2.6 billion USD. Is that right?

 

[Soph]

Quote from comintel:

Wasn't this addressed when IB posted:

"To start, and so as not to leave any confusion as to the position of IB vis-à-vis the Thomson Reuters news article, IB DOES NOT, in any way:

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

2. Invest customers’ segregated funds in foreign sovereign debt or utilize in-house repurchase agreements;

3. Commingle or utilize customer segregated assets for proprietary operations;

4. Enter into agreements which are designed to take advantage of supposedly unrestricted U.K. re-hypothecation rules; or

5. Engage in transactions deemed as “hyper-hypothecation”.

It most certainly would.

However one would want to see such a statement directly from a customer service/account service representative via their official communication channels. Although that post is certainly positive in nature for customers, the message does need to come from a confirmed and verifiable IB communications channel.

In the alternative, a statement from IB to their customers via one of their standard communication conduits (email, website, etc) would also suffice.

But a post to a forum thread by an unverified source probably should not suffice for most concerned about IB's position on this matter.

 

[stock777]

Quote from FreakofNature:

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

It would be even sadder if Corswine was allowed to keep one cent of his net worth unless every client was made whole.

100% impoverishment and 20 years in prison will make the next asshole think 3 or 4 hundred times.

 

[Swan Noir]

Guys ... I'm not suggesting the rehype question is not relevant or that it might not prove to be important but what I know is important is to recognize what Corzine was trying to at MF and just how different IB is.

Corzine was trying to take a AA futures firm that had not made money in some time into the major leagues without spending anytime in AAA. And, to make it more speculative, he was totally changing the business model from a futures broker to an investment bank with a highly leveraged principal transaction trading desk.

He needed to win on the leveraged bond positions to restore profitability and raise a big chunk of capital -- he has (excuse me ... had) entry to all the worlds pools of capital. This was an arrogant man with a great deal of experience and expertise who decided to pick up the dice and roll them.

IB is a firm of substance that knows what business they are in. They have significant equity at risk that goes before any of what they owe goes twirling down the bowel and, unless they stuff junk into the segregated accounts, the "money good" short term obligations will survive and pay out.

Is there risk? Sure ... nothing is really guaranteed in the end. Has the industry used their K Street lobbyists to further slime up an industry that has always been a whorehouse industry? Absolutely. Are there multiple was segregate funds can go up in smoke ... most of which have not been even touched on here on ET? For sure ... I can think of a few without even fipping the brain on switch.

But, here in the real world, we protect ourselves and have no belief that anyone will do it for us. Once they picked up the dice at MF and things began to go sideways their clients were dealing with Charlie Sheen as the blow was running out and the party girls were putting their purple much too high heels on.

I'm not defending anyone but I really doubt that IB is at the party and I also doubt that those with the big -- really big -- equity in the firm are just dying to shoot the wad on the hard 10. These are very different firms, with very different business models and very different principals. These guys probably just want to rake in some extra juice while using our cash balances and our securities in ways that do not endanger there survival.

I'm OK with that. I'm more concerned that fruits and vegetables now come from Dupont and that we all know customer service went the way of the Model T circa 1970. Relax guys. This is not a high risk proposition. That said I have less than the SIPC max there ... lol.