Did it go anything like this...
"We Are Re-hypothecating If You Please and We Are Re-hypothecating if You Don't Please..."
http://www.youtube.com/watch?v=KdDla0QW844
InteractiveBrokers "hyper-hypothecates" $14.5b of Customer Funds?
- Thread starter Chicago_CTA
- Start date
"We Are Re-hypothecating If You Please and We Are Re-hypothecating if You Don't Please..."
http://www.youtube.com/watch?v=KdDla0QW844
On the contrary, I received a response from IB customer support this
morning that spoke directly to the questions I put forward. It was quite
refreshing to see them be that direct and transparent. They provided
considerable detail and addressed the issues directly. It also
contained their very detailed repsonse to the Reuters aritcle, which I
had not seen.
As I stated in my original post, IB could either prove the assumtions on
hyper-hypothecation/UK etc activities wrong (which they ultimately
have) in which point there is no substantive issue. Or failing that, one could close their account. Fortunately it was the prior that did bear fruit
and I'm quite satified with IB's response to this matter.
From Zero-Hedge Article
"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-hypothecatio n typically takes place in the form of a stock loan. In simple terms, IB borrows money from a third party, using the customerâs margin stock as collateral, and it lends those funds to the customer to finance the customerâs purchase. -
The Thomson Reuters news article alleged that IB, among other brokers, engaged in a practice that the author categorizes as âhyper-hypo thecationâ (apparently a term used to describe a process in which a broker alters the risk of one financial instrument into the exposure of multiple other instruments and perhaps multiple counterparties through a daisy-chain series of pledges) at an amount of $14.5 billion."
I can't see the problem, obviously IB needs to hypotecate otherwise margin lending is impossible.
Its this Hyper-hypothecation that is the issue. IB specifically denies doing it. Interestingly they also seem to not know exactly what it refers to!
Now its an issue of whether to believe them. But right now they have in plain language denied it.
Its still an interesting concept that ZH brings up, Lets not forget that ZH managed to survive 2008 like nothing happened, remember the rumors about CD's and sub-prime investments, I remember that they also came out in plain language and denied trading in CDO's or CD's.
Issue for me is not IB, but the rest of financial system, you always have these "consultants/wankers" looking for ways to get around the rules within the law, they either work in the banks or sell these structures too the banks. Eventually everybody figures out how to do it, and then does it. Of course the regulators are the last to cotton on.
This whole thing might just be to IB advantage, as losers like MF-Global go to the wall IB will pick up cheap assets, I find it very comforting that IB bid for the assets and then walked away, they could have been looking at a$`1.2b smack.
"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-hypothecatio n typically takes place in the form of a stock loan. In simple terms, IB borrows money from a third party, using the customerâs margin stock as collateral, and it lends those funds to the customer to finance the customerâs purchase. -
The Thomson Reuters news article alleged that IB, among other brokers, engaged in a practice that the author categorizes as âhyper-hypo thecationâ (apparently a term used to describe a process in which a broker alters the risk of one financial instrument into the exposure of multiple other instruments and perhaps multiple counterparties through a daisy-chain series of pledges) at an amount of $14.5 billion."
I can't see the problem, obviously IB needs to hypotecate otherwise margin lending is impossible.
Its this Hyper-hypothecation that is the issue. IB specifically denies doing it. Interestingly they also seem to not know exactly what it refers to!
Now its an issue of whether to believe them. But right now they have in plain language denied it.
Its still an interesting concept that ZH brings up, Lets not forget that ZH managed to survive 2008 like nothing happened, remember the rumors about CD's and sub-prime investments, I remember that they also came out in plain language and denied trading in CDO's or CD's.
Issue for me is not IB, but the rest of financial system, you always have these "consultants/wankers" looking for ways to get around the rules within the law, they either work in the banks or sell these structures too the banks. Eventually everybody figures out how to do it, and then does it. Of course the regulators are the last to cotton on.
This whole thing might just be to IB advantage, as losers like MF-Global go to the wall IB will pick up cheap assets, I find it very comforting that IB bid for the assets and then walked away, they could have been looking at a$`1.2b smack.
For all those wondering why re-hypothecation occurs.... here is a suggestion in an example: It is an example only I am not saying its right or wrong )
lets say you have $100 in a broker account and purchase $40 worth of stock. Traditionally you would own the stock and maybe get interest on your remaining $60 at 50 bps below cash rates.
Nowdays to buy that $40 worth of stock the broker actually makes you lend the money with a small margin. so you actually put up $10 and borrow $30.
For the borrow you pay a clip/spread/cost.
So you have the same exposure to the stock $40, but you also have a loan of $30 at which you are paying 50bp above cash, and receiving interest on your total balance $90 (ie; $100 - $10 margin)
So your total book is actually $90 cash $10 to margin, $30 loan......
So ask your self....stick it in a simple spreadsheet and see.
Lets assume interest rates at 5% on money you have at the broker, and the charge for borrowing is 5.5%.....a 50 bp clip....more than fair...
Assuming the stock price does not change....iel; it is still at $40
So in the old days....you received $60*5%=$3 interest at the end of the year.
whereas with Rehypo...
You have received $90 * 5%=$4.50 interest for the year.....BUT you have paid $30*5.5%=$1.65.....
Net amount you receive $3 on one way, and 4.5-1.65=$2.85 the other way.....
where do you think that money goes? That is a reason for why it may be done. (I am not saying it is)
(While many complain about the contract they did not read or understand and yet still signed, many also just trust and dont understand or account for the costs of doing business either.
This does not negate that I do believe we need more transparency and less legalese without extra regulations.....which wont stop fraud and misuse of funds anyway.)
just food for thought.
)lets say you have $100 in a broker account and purchase $40 worth of stock. Traditionally you would own the stock and maybe get interest on your remaining $60 at 50 bps below cash rates.
Nowdays to buy that $40 worth of stock the broker actually makes you lend the money with a small margin. so you actually put up $10 and borrow $30.
For the borrow you pay a clip/spread/cost.
So you have the same exposure to the stock $40, but you also have a loan of $30 at which you are paying 50bp above cash, and receiving interest on your total balance $90 (ie; $100 - $10 margin)
So your total book is actually $90 cash $10 to margin, $30 loan......
So ask your self....stick it in a simple spreadsheet and see.
Lets assume interest rates at 5% on money you have at the broker, and the charge for borrowing is 5.5%.....a 50 bp clip....more than fair...
Assuming the stock price does not change....iel; it is still at $40
So in the old days....you received $60*5%=$3 interest at the end of the year.
whereas with Rehypo...
You have received $90 * 5%=$4.50 interest for the year.....BUT you have paid $30*5.5%=$1.65.....
Net amount you receive $3 on one way, and 4.5-1.65=$2.85 the other way.....
where do you think that money goes? That is a reason for why it may be done. (I am not saying it is)
(While many complain about the contract they did not read or understand and yet still signed, many also just trust and dont understand or account for the costs of doing business either.
This does not negate that I do believe we need more transparency and less legalese without extra regulations.....which wont stop fraud and misuse of funds anyway.)
just food for thought.
I never said they would, simply pointing this fact out for anyone who thought that IB-AN's response was specifically responding to the questions in this thread. It was not, and most of the questions still asked in this thread remain unanswered.
So in light of this fact, IB-AN's boilerplate cut and paste press release post becomes much less significant, and I for one as an IB client would be much more satisfied if he actually bothered to address the specific questions many of us have asked here.
def
Sponsor
Quote from SIUYA:
For all those wondering why re-hypothecation occurs.... here is a suggestion in an example: It is an example only I am not saying its right or wrong
lets say you have $100 in a broker account and purchase $40 worth of stock. Traditionally you would own the stock and maybe get interest on your remaining $60 at 50 bps below cash rates.
Nowdays to buy that $40 worth of stock the broker actually makes you lend the money with a small margin. so you actually put up $10 and borrow $30.
For the borrow you pay a clip/spread/cost.
So you have the same exposure to the stock $40, but you also have a loan of $30 at which you are paying 50bp above cash, and receiving interest on your total balance $90 (ie; $100 - $10 margin)
So your total book is actually $90 cash $10 to margin, $30 loan......
So ask your self....stick it in a simple spreadsheet and see.
Lets assume interest rates at 5% on money you have at the broker, and the charge for borrowing is 5.5%.....a 50 bp clip....more than fair...
Assuming the stock price does not change....iel; it is still at $40
So in the old days....you received $60*5%=$3 interest at the end of the year.
whereas with Rehypo...
You have received $90 * 5%=$4.50 interest for the year.....BUT you have paid $30*5.5%=$1.65.....
Net amount you receive $3 on one way, and 4.5-1.65=$2.85 the other way.....
where do you think that money goes? That is a reason for why it may be done. (I am not saying it is)
(While many complain about the contract they did not read or understand and yet still signed, many also just trust and dont understand or account for the costs of doing business either.
This does not negate that I do believe we need more transparency and less legalese without extra regulations.....which wont stop fraud and misuse of funds anyway.)
just food for thought.
If there is $100 in the account and $40 worth of stock is purchased, there is no margin utilization and thus no loan. Thus your ascertion is incorrect.
def - thats why I did not say it was necessarily done by Interactive Brokers.....but I have seen some providers do it this way. Sorry if it may be interpreted as such.
On that note, as others have asked - why then is rehypothecation done by Interactive Brokers for those clients who dont use margin, OR are using futures and require no extra margin as required by the exchanges? Why does it exist?
I think if its merely that long stock from clients is pooled and then lent to others wishing to borrow, then it might put a lot of minds at ease. A simple example for why it occurs.
thanks.
On that note, as others have asked - why then is rehypothecation done by Interactive Brokers for those clients who dont use margin, OR are using futures and require no extra margin as required by the exchanges? Why does it exist?
I think if its merely that long stock from clients is pooled and then lent to others wishing to borrow, then it might put a lot of minds at ease. A simple example for why it occurs.
thanks.