InteractiveBrokers "hyper-hypothecates" $14.5b of Customer Funds?
- Thread starter Chicago_CTA
- Start date
The point here is that we all suddenly realize that we have counterparty exposure we didn't know we had.
It's NOT a question of how trustworthy and responsible those counterparties are. It's that we didn't know we had ANY counterparty exposure and it turns out we do.
If I open a brokerage account and buy shares of Home Depot, the only counterparty I thought I had exposure to was Home Depot.
I thought if my broker went bankruped then my SEGRIGATED funds would be transfered to another brokerage. PERIOD.
Now, if my broker is allowed to use the assets in my account as collateral for a loan from a third party, (say Bank of America) suddenly I have counterparty exposure to my (1) broker, (2) Bank of America, and (3) Home Deopot.
Now, if my broker takes the funds they got by using my assets as collateral and invests them in some money market account, I also have counterparty exposure to that money market account.
It's not about how little or how much is rehypothecated. It's not about how safe or risky the counterpartys are. It's about the fact that the counterparty picture is totaly different than what nearly everyone thought.
Picture A Counter Party Exposure:
(1) Exposure only to what I invest in
(i.e. exposure only to what I choose to have exposure to)
Picture A Counter Party Exposure:
(1) Exposrue to what I invest in
(2) Exposure to my brokerage (even if they aren't breaking any law)
(3) Exposure to whatever firm my broker sent my assets to as collateral.
(4) Exposure to what ever my broker invests the funds recieved from using my assets as collateral in.
Totaly different picture.
What I don't get is why they NEED to rehypothecate. From IB-AN:
"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."
Replace? REPLACE? Are you kidding me? When someone lends money, it doesn't get replaced. The lender LOOSES the use of it. Thats WHY they charge INTEREST. For the use of the money.
What it looks like to me is a loophole where they can lend the money, charge interest and by subjecting the borrower to risk "replace" the money, presumably so it can be lent out again to get even more interest.
Ya, they may be giving our assets as collateral to a "safe" third party and investing the "replaced" funds in a "safe" investment. But why?
If it's because the broker doesn't have enough of it's own money and can't borrow on it's own enough money to do the amount of margin lending it wants to, shouldn't that tell you something right there?
In what other kind of loan (credit card, auto, home?) can the lender charge interest and at the same time "replace" the money they lent by taking 140% of that ammount of the borrowers assets, and use them as collateral to get even more money back, which they can also persumably lend out and charge even more interest on?
And for those saying a home gets rehypothecated when the mortgage is transfered to a different lender. That's not even close.
If rehypothecation worked the way one lender selling a mortgage to another lender works then, rehypothecation would effectively mean my broker would transfer my entire account to another brokerage.
Instead the way it seems to work, is more as if a contractor put a lein on my house while they were doing some work on it and then, on that basis gave an ammount of MY house's equity equal to 140% the vale of that lein to a bank in return for some funds.
It's NOT a question of how trustworthy and responsible those counterparties are. It's that we didn't know we had ANY counterparty exposure and it turns out we do.
If I open a brokerage account and buy shares of Home Depot, the only counterparty I thought I had exposure to was Home Depot.
I thought if my broker went bankruped then my SEGRIGATED funds would be transfered to another brokerage. PERIOD.
Now, if my broker is allowed to use the assets in my account as collateral for a loan from a third party, (say Bank of America) suddenly I have counterparty exposure to my (1) broker, (2) Bank of America, and (3) Home Deopot.
Now, if my broker takes the funds they got by using my assets as collateral and invests them in some money market account, I also have counterparty exposure to that money market account.
It's not about how little or how much is rehypothecated. It's not about how safe or risky the counterpartys are. It's about the fact that the counterparty picture is totaly different than what nearly everyone thought.
Picture A Counter Party Exposure:
(1) Exposure only to what I invest in
(i.e. exposure only to what I choose to have exposure to)
Picture A Counter Party Exposure:
(1) Exposrue to what I invest in
(2) Exposure to my brokerage (even if they aren't breaking any law)
(3) Exposure to whatever firm my broker sent my assets to as collateral.
(4) Exposure to what ever my broker invests the funds recieved from using my assets as collateral in.
Totaly different picture.
What I don't get is why they NEED to rehypothecate. From IB-AN:
"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."
Replace? REPLACE? Are you kidding me? When someone lends money, it doesn't get replaced. The lender LOOSES the use of it. Thats WHY they charge INTEREST. For the use of the money.
What it looks like to me is a loophole where they can lend the money, charge interest and by subjecting the borrower to risk "replace" the money, presumably so it can be lent out again to get even more interest.
Ya, they may be giving our assets as collateral to a "safe" third party and investing the "replaced" funds in a "safe" investment. But why?
If it's because the broker doesn't have enough of it's own money and can't borrow on it's own enough money to do the amount of margin lending it wants to, shouldn't that tell you something right there?
In what other kind of loan (credit card, auto, home?) can the lender charge interest and at the same time "replace" the money they lent by taking 140% of that ammount of the borrowers assets, and use them as collateral to get even more money back, which they can also persumably lend out and charge even more interest on?
And for those saying a home gets rehypothecated when the mortgage is transfered to a different lender. That's not even close.
If rehypothecation worked the way one lender selling a mortgage to another lender works then, rehypothecation would effectively mean my broker would transfer my entire account to another brokerage.
Instead the way it seems to work, is more as if a contractor put a lein on my house while they were doing some work on it and then, on that basis gave an ammount of MY house's equity equal to 140% the vale of that lein to a bank in return for some funds.
Where can customers easily check on the amount of cash held in the Reserve Bank Account?
This figure falls under the weekly (Friday) calculation broker-dealers are required to perform.
The Reserve Bank Account at MF is what came up short.
To IB-An, does IB post the Reserve Bank Account balance just twice a year or is the amount disclosed somewhere else more frequently?
Thanks for everyone's contributions on this thread. Reading with keen interest. Always like to learn and looking at ways to mitigate some of the risks posed here.
Most of the references to being able to rehypothecate funds indicate that you need to carry a margin loan through futures or shorting equities.
What's the implication for option writers who always maintain a positive cash balance, but carry contract obligations?
Most of the references to being able to rehypothecate funds indicate that you need to carry a margin loan through futures or shorting equities.
What's the implication for option writers who always maintain a positive cash balance, but carry contract obligations?
Here's a question...
Where do broker-dealers get the leverage to lend to customers?
If a customer can post 1/20th to buy a full contract, why doesn't the Broker post 1/20th to buy the full contract to leverage it's own account? Why the need to rehypothecate customer funds 3 or 4 times to build their own portfolio?
I recognize there's a reason since the later is how it's done, but curious?
Where do broker-dealers get the leverage to lend to customers?
If a customer can post 1/20th to buy a full contract, why doesn't the Broker post 1/20th to buy the full contract to leverage it's own account? Why the need to rehypothecate customer funds 3 or 4 times to build their own portfolio?
I recognize there's a reason since the later is how it's done, but curious?
Zero Hedge has weighed in. And apparently IB-AN's response is a boilerplate response that has gone out to several recipients..
http://www.zerohedge.com/news/denia...t-has-not-engaged-commingling-rehypothecation
http://www.zerohedge.com/news/denia...t-has-not-engaged-commingling-rehypothecation