Is cash no longer fully insured in an IB account ?

[opt789]

IB-AN,
I understand what you are saying by giving the choice of where excess cash goes to the customer.

Can you address what the lawyer at the SIPC told me, in that they would consider not covering cash in a securities account if it was seen to be just used as a holding place for a commodities trader?

 

[IB-AN]

Quote from Joe Doaks:

Does this have any relevance to Universal accounts? I thought the issue was sweeping between two different account types. Thanks.

Yes, it does. Underlying the IB Universal account are two separate segments or sub-accounts, one for the securities positions and balances which are subject to the customer protection rules of the SEC and another for the commodities positions and balances which are subject to the customer protection rules of the CFTC. This account structure is designed to minimize the administrative overhead that customers would otherwise be exposed to were they to maintain two distinct accounts (e.g., transferring of cash between accounts, order submission through separate accounts, multiple statements, etc.) while preserving the separation required for the distinct regulatory protection schemes.

That being said, if you are only trading securities and not futures or futures options, then the commodities segment is not a factor and this whole discussion non-applicable to your situation.

 

[Joe Doaks]

Thanks for the explanation. I just fell off the turnip truck. Where does cash fit in to the two segments in a Universal account?

 

[IB-AN]

Quote from opt789:

IB-AN,
I understand what you are saying by giving the choice of where excess cash goes to the customer.

Can you address what the lawyer at the SIPC told me, in that they would consider not covering cash in a securities account if it was seen to be just used as a holding place for a commodities trader?

It would be difficult for me to comment on a discussion which I wasn't a party to, but what I would note is that if you do not have a securities account (i.e., didn't not request permissions to trade securities at the point of application or via an account upgrade thereafter and received compliance approval to do so), IB will not transfer cash from the commodities to the securities account.

 

[Options12]

How about Single Stock Futures -- SEC-side or CFTC-side as far as the Universal sub accounts go?

 

[opt789]

Quote from IB-AN:

It would be difficult for me to comment on a discussion which I wasn't a party to, but what I would note is that if you do not have a securities account (i.e., didn't not request permissions to trade securities at the point of application or via an account upgrade thereafter and received compliance approval to do so), IB will not transfer cash from the commodities to the securities account.

The assumption here is that a customer opens an account with a broker (IB, thinkorswim, or any other that allows both securities and futures trading) and sets up everything correctly so they have both securities and commodities trading permissions. Then that trader proceeds to just trade in the commodities account and happens not to trade any securities, but only uses the securities account to hold his excess cash.

The SIPC may, in a liquidation, come in and look at that trader and say – that trader was just a commodities trader, he was just using his securities account to hold his excess cash, therefore the SIPC insurance will not cover the cash in his account.

Personally I think this is ridiculous, but it is something to be aware of. From recent news reports I would say it is clear that the SIPC works like any insurance company whereby they do everything they can to not pay claims if they can get away with it.

 

[Rodney King]

Quote from opt789:

Then that trader proceeds to just trade in the commodities account and happens not to trade any securities, but only uses the securities account to hold his excess cash.

The SIPC may, in a liquidation, come in and look at that trader and say – that trader was just a commodities trader, he was just using his securities account to hold his excess cash, therefore the SIPC insurance will not cover the cash in his account.

Personally I think this is ridiculous,

Rather than ridiculous, this strikes me as completely reasonable. In general, the economics should matter, not the paperwork. If you are, in fact, a futures-only trader, why should you be entitled to SIPC coverage? The coverage is intended for widows-and-orphans type of accounts, not as a loophole for sharp operators to use to shield their futures trading from Corzine risk.

 

[IB-AN]

Quote from Options12:

How about Single Stock Futures -- SEC-side or CFTC-side as far as the Universal sub accounts go?

The OneChicago single stock futures contract is a hybrid product meaning that it is jointly regulated by the CFTC and SEC and can be carried in either account. IB elects to carry all such futures contracts in the securities account as this is the only way one can receive margin relief between the single stock future and a securities option or stock position.

 

[rwk]

Quote from IB-AN:
2. That IB holds commodity cash balances solely in either short-term U.S. Treasury securities . . . and general obligations of a sovereign nation.

As we are all now painfully aware, sovereign debt is not always low-risk. Will we be able to specify which assets classes are to be avoided (e.g. Greek bonds)?

I see that SIPC says that accounts are not insured against fraud or mismanagement (http://www.stanford-antigua-sec-lawsuit.com/). Considering that the MF Global case might have involved fraud or mismanagement, is there anything more IB can do to put our minds at ease?

 

[ammo]

i agree rod,but the idea of them(the house) using your money for their accts and not being liable if they lose is insane,if we go debit using their margin,which we pay for the privilege thru brokerage fees,they borrow our money as a favor for letting us clear there,are we not liable,why does everyone except this and argue over the leftover table scraps