Is cash no longer fully insured in an IB account ?
- Thread starter Damrak
- Start date
rwk, cash may not be automatically covered just because it is carried in, or swept into, a securities sub-account.
This is because cash generated from commodities trading and swept into a securities account may not be eligible for SIPC coverage.
SIPC clarified this in a letter to the SEC in 2007 when they wrote:
"Under SIPA, a customer's claim for "cash" derives from a few sources. One, the "cash" arises from the broker's sale of securities for the account of the customer. Two, the "cash" has been deposited by the customer with the broker for the purpose of purchasing securities. Three, the cash consists of dividends or other return generated on securities held by the broker for the customer. 15 U.S.C. $78lJ(2). Key is the fact that the cash owed by the broker to the customer is on deposit in connection with the purchase or sale of a "security," as defined in SPA. The facile labelling of an asset as "cash"does not transform it into a protected asset if unrelated to the purchase or sale of a "security." http://www.sec.gov/comments/s7-08-07/s70807-16.pdf
On the same subject, the NFA board has advised FCM's of additional disclosure obligations in relation to cash sweep arrangements and customer protection.
"The Board also believes that FCMs should advise customers of the consequences of transferring monies from the FCM's customer regulated accounts. Specifically, the FCM should disclose that by transferring excess funds from an FCM's customer regulated commodity accounts, the customer will not receive the preferential treatment afforded funds held in a customer regulated commodity account pursuant to Part 190 of the CFTC's Regulations and the U.S. Bankruptcy Code. The Board recognizes, however, that an FCM may offer programs that transfer monies to an account whereby customers receive certain protections (e.g. SIPC or FDIC) in the event of a bankruptcy. In this case, the FCM should disclose the nature and extent of the protection available, including any applicable SIPC or FDIC coverage. If the FCM's programs transfer funds to a non-regulated account that does not offer protections comparable to those afforded funds held in a customer regulated commodity account, then the FCM must clearly disclose this fact and describe the impact upon customer funds in the unlikely event that the entity maintaining the sweep account files for bankruptcy."
http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=9059&Section=9
It may be that cash generated in a commodities account and swept to a securities account may not enjoy protection under the CFTC or the SIPC. So this is definitely a topic worth exploring further.
Excellent research, Options12.
I think that people mostly trading commodity futures at IB would be wise to at least occasionally buy some securities.
That way, they can argue that the cash has been deposited by the customer with the broker for the purpose of purchasing securities.
If a broker ever fails and SIPC indemnification is triggered, and this "sweep" question arises, the SIPC will be in a difficult position but is likely to give the benefit of the doubt to accounts where there were at least some periodic purchases of securities.
If there are no purchases of securities at any time, those accounts would be the most vulnerable to being denied SIPC coverage. Even then, people would create a huge fuss and my guess is the SIPC would end up giving coverage but possibly clarifying the rules from that point forward.
I think that people mostly trading commodity futures at IB would be wise to at least occasionally buy some securities.
That way, they can argue that the cash has been deposited by the customer with the broker for the purpose of purchasing securities.
If a broker ever fails and SIPC indemnification is triggered, and this "sweep" question arises, the SIPC will be in a difficult position but is likely to give the benefit of the doubt to accounts where there were at least some periodic purchases of securities.
If there are no purchases of securities at any time, those accounts would be the most vulnerable to being denied SIPC coverage. Even then, people would create a huge fuss and my guess is the SIPC would end up giving coverage but possibly clarifying the rules from that point forward.
Interesting. . .
The statement by the NFA clearly indicates that sweeping cash from commodities to securities strips away "segregated account" status. But the funds missing in the MF Global failure had segregated account status, and that protection is very much in question.
The statement by SIPC indeed raises doubts about protection for commodities gains, and perhaps performance bond as well. But the sweep from commodities to securities also co-mingles the funds. I'm not sure how SIPC would be able then to separate out the uninsured portion.
I note that IB also has insurance with Lloyds. It's not clear to me whether cash balances in commodities are covered and how the sweep would affect that.
Since the MF Global failure, my assumption is the staff of Interactive Brokers researched SIPC coverage requirements and found the best way to revise client universal accounts to allow clients to choose how to handle the movement of excess cash within the universal accounts; However, I agree with the previous post that the SIPC coverage of cash transferred from the commodities account to the securities account within the universal account could possibly be denied.