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Is cash no longer fully insured in an IB account ?
- Thread starter Damrak
- Start date
Quote from comintel:
Forex traders do not just convert foreign currency back and forth. They do it on leverage of 40 to one. So I think it would be easy enough to identify forex trades that way, despite any attempt to camouflage them.
True, but one can just have a debit balance in a currency in a credit in another... I know, the effect is the same but the point is I don't think the purpose of SIPC regulation is avoid insurance on this, neither I don't recall any broker failure where they made a point on this matter, as if the clients had to prove this or that. I mean, it was always automatic, you fill a form or they do it themselves from the broker statements, cash is always cash.
Quote from comintel:
Their syntax is slightly mangled but they mean "cash swept into a securities account," not "commodities transactions swept into a securities account ."
Unfortunately, I think that their position is entirely reasonable and consistent with the purposes and intent of the SIPA, and that courts would be likely to give it great deference and respect.
Again, IMO this is just the clueless lawyer defense answer, it's not even possible to move commodities into a SIPC account other than a few exceptions. With IB, from a pure law point of view you have 2 accounts, a Commodities and an SIPC. Just because you transfer cash back and forth there's no way in earth I could see somehow they claim that cash is not insured. What if I did commodities in a hidden offshore account at another institution and transferred the money back and forth on a daily basis, would the SIPC deny coverage? What If I did that on a dormant FDIC bank account that I never used for anything else, would they deny on the same basis? Come on guys, there are a lot of things I worry about risk-wise but this ain't one of them. Not to say I trust these govt-entities like God - quite the contrary - I just happen to better sleep at night spreading my money around instead of relying on any lawyer.
Velosoandre, check with IB on this issue before promoting your view that forex and commodities cash sweeps are protected by SIPC. IB may be in the process of changing their advertisements on this matter.
Here's a statement on the subject from FINRA (emphasis added):
Customers also face counterparty risk, as there is no central clearing organization for forex transactions. Customers may not know where their funds will be held or by whom. They may also not know that, unlike securities, funds deposited into an account with a broker-dealer for investment in any currency, or which are the proceeds of the sale of a currency position, or any currency in an account with a broker-dealer, are not protected by the Securities Investor Protection Corporation (SIPC).
FINRA also reminds firms that SIPC rules prohibit references to SIPC membership or protection in communications regarding commodities, including forex.
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117362.pdf
Here's a statement on the subject from FINRA (emphasis added):
Customers also face counterparty risk, as there is no central clearing organization for forex transactions. Customers may not know where their funds will be held or by whom. They may also not know that, unlike securities, funds deposited into an account with a broker-dealer for investment in any currency, or which are the proceeds of the sale of a currency position, or any currency in an account with a broker-dealer, are not protected by the Securities Investor Protection Corporation (SIPC).
FINRA also reminds firms that SIPC rules prohibit references to SIPC membership or protection in communications regarding commodities, including forex.
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117362.pdf
Options12:
I don't trade forex. So I'm not sure about this, but isn't there a difference between a forex broker and a forex broker-dealer? I was under the impression that IB was a forex broker, not a broker-dealer.
Jack [/QUOTE]
I don't know. Maybe IB can clarify that here.
However, would this impact whether forex cash is SIPC protected?
I don't trade forex. So I'm not sure about this, but isn't there a difference between a forex broker and a forex broker-dealer? I was under the impression that IB was a forex broker, not a broker-dealer.
Jack [/QUOTE]
I don't know. Maybe IB can clarify that here.
However, would this impact whether forex cash is SIPC protected?
Quote from Options12:
Velosoandre, check with IB on this issue before promoting your view that forex and commodities cash sweeps are protected by SIPC. IB may be in the process of changing their advertisements on this matter.
Here's a statement on the subject from FINRA (emphasis added):
Customers also face counterparty risk, as there is no central clearing organization for forex transactions. Customers may not know where their funds will be held or by whom. They may also not know that, unlike securities, funds deposited into an account with a broker-dealer for investment in any currency, or which are the proceeds of the sale of a currency position, or any currency in an account with a broker-dealer, are not protected by the Securities Investor Protection Corporation (SIPC).
FINRA also reminds firms that SIPC rules prohibit references to SIPC membership or protection in communications regarding commodities, including forex.
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117362.pdf
I do hope both IB - and any other brokers out there using the same system - and SIPC and FINRA to clarify, because even after reading this it's still not possible. Look, they can state the law they want, but there's no way you can prove a certain use of the cash, otherwise the whole point of any foreign cash being insured in a SIPC account is pointless and better to be assumed as not existent. Proving the "use" would be a true 3rd world pandora's box right in the core of the U.S. finantial system. I'm not trying to promote or discourage IB or anyone else, I'm just stating the obvious - prove the use, intention or whatever is impossible. If SIPC really wants to go to that route we better treat this insurance as complete garbage (but I don't think that's the case)
Like I said in those examples - to remind, a simple case where you transfer back and forth cash from another bank, or another broker, or any place where SIPC can't even see what the "use" of that cash was all about. They just can't deny it. Or you opened the account, did an FX trade and then the broker failed the next day - would SIPC deny your insurance because you didn't have time to buy the stock the next day, and all you had in your account was a "FX Trade"?
I do get the point that FX pairs are not insured, i mean those products traded in "bucket-shops", where each pair is built as a single product, you receive the interest in a certain way, etc. I get commodity futures not being insured - sure, they can't even be put into an SIPC account anyway, I get that. But being deny based on the "use" of the cash you make, while at the same time trying to insure all cash, both USD and foreign? Sorry that's simply not possible neither seen in my lifetime, that's just my opinion.
In my perception SIPC nor FINRA is seeing exactly what we are asking them, but rather just banging their heads and repeating what we already know - that FX products are not insured.
In the end, after full clarification on this matter, we can only reach two points: SIPC insures foreign cash, period, regardless where does it comes from, or it doesn't, regardless of use, that's the pratical point. Having both based on use it's not possible.
Check: http://ibkb.interactivebrokers.com/node/1267
Scroll down to "Common Questions" and click:
Are cash balances which are denominated in currencies other than USD afforded SIPC protection?
My guess is that IB will eventually address this topic under that link.
Scroll down to "Common Questions" and click:
Are cash balances which are denominated in currencies other than USD afforded SIPC protection?
My guess is that IB will eventually address this topic under that link.
Quote from velosoandre:
I do hope both IB - and any other brokers out there using the same system - and SIPC and FINRA to clarify, because even after reading this it's still not possible. Look, they can state the law they want, but there's no way you can prove a certain use of the cash, otherwise the whole point of any foreign cash being insured in a SIPC account is pointless and better to be assumed as not existent. Proving the "use" would be a true 3rd world pandora's box right in the core of the U.S. finantial system. I'm not trying to promote or discourage IB or anyone else, I'm just stating the obvious - prove the use, intention or whatever is impossible. If SIPC really wants to go to that route we better treat this insurance as complete garbage (but I don't think that's the case)
Like I said in those examples - to remind, a simple case where you transfer back and forth cash from another bank, or another broker, or any place where SIPC can't even see what the "use" of that cash was all about. They just can't deny it. Or you opened the account, did an FX trade and then the broker failed the next day - would SIPC deny your insurance because you didn't have time to buy the stock the next day, and all you had in your account was a "FX Trade"?
I do get the point that FX pairs are not insured, i mean those products traded in "bucket-shops", where each pair is built as a single product, you receive the interest in a certain way, etc. I get commodity futures not being insured - sure, they can't even be put into an SIPC account anyway, I get that. But being deny based on the "use" of the cash you make, while at the same time trying to insure all cash, both USD and foreign? Sorry that's simply not possible neither seen in my lifetime, that's just my opinion.
In my perception SIPC nor FINRA is seeing exactly what we are asking them, but rather just banging their heads and repeating what we already know - that FX products are not insured.
In the end, after full clarification on this matter, we can only reach two points: SIPC insures foreign cash, period, regardless where does it comes from, or it doesn't, regardless of use, that's the pratical point. Having both based on use it's not possible.
Well the SIPC claim form in this situation is probably going to ask a few questions along the lines of:
(1) Was this account established and used primarily for the purpose of investing in securities? If not, explain.
(2) Was this account used for purposes other than investing in securities? If so, provide details including frequency and amounts of such transactions.
(3) Was this account used for foreign exchange trading?
(4) Were arrangements in place to regularly sweep idle cash from a futures account into this account? If so, was the purpose of the arrangement to obtain SIPC insurance for these amounts? If not, what was the purpose?
If you are prepared to lie in answering such questions, and/or can show a decent volume of securities purchases in the account, then yes, they might honor your claim.
Quote from comintel:
Well the SIPC claim form in this situation is probably going to ask a few questions along the lines of:
(1) Was this account established and used primarily for the purpose of investing in securities? If not, explain.
(2) Was this account used for purposes other than investing in securities? If so, provide details including frequency and amounts of such transactions.
(3) Was this account used for foreign exchange trading?
(4) Were arrangements in place to regularly sweep idle cash from a futures account into this account? If so, was the purpose of the arrangement to obtain SIPC insurance for these amounts? If not, what was the purpose?
If you are prepared to lie in answering such questions, and/or can show a decent volume of securities purchases in the account, then yes, they might honor your claim.
Never heard or never saw such thing. For instance, latest SIPC claim form for MF Global customers is online for everyone to see and it's actually much simpler than any of you would imagine.
As for the "lying", as I said it's not provable one way or another. If a guy ever opens a 100k account, converts into say AUD to buy an aussie stock and the broker fails the next day before you even put an order, how do you prove one way or how does SIPC proves another? IMO, cash "for the purpose of purchasing securities" is whatever cash (both USD or a foreign) you have with a SIPC-regulated account that is yet not invested in any non-insured product (of which FX pairs as designed by bucket shops are among them). But everyone is free to have another opinion.
Quote from velosoandre:
Never heard or never saw such thing. For instance, latest SIPC claim form for MF Global customers is online for everyone to see and it's actually much simpler than any of you would imagine.
As for the "lying", as I said it's not provable one way or another. If a guy ever opens a 100k account, converts into say AUD to buy an aussie stock and the broker fails the next day before you even put an order, how do you prove one way or how does SIPC proves another? IMO, cash "for the purpose of purchasing securities" is whatever cash (both USD or a foreign) you have with a SIPC-regulated account that is yet not invested in any non-insured product (of which FX pairs as designed by bucket shops are among them). But everyone is free to have another opinion.
The SIPC claim form for MF Global customers does indeed have a full set of questions designed to cover issues that arise in the MF Global case. I append them below.
The questionnaire is tailored by SIPC for each particular firm.
If a broker with universal accounts and a sweep policy and SIPC like IB were to go under, they would need questions like the ones I mentioned if they are going to implement their stated policies as to limitations on SIPC coverage for sweeps from futures accounts and forex trading. Otherwise they would be negligent and would be sued for paying out claims ineligible for coverage under their own stated policies.
From the SIPC MF Global claim form:
III. ADDITIONAL INFORMATION ABOUT YOUR CLAIM
NOTE: Please check the appropriate answer for items 1 through 8, below. If you select âYES,â for any item, please provide a detailed explanation on a signed attachment, and attach any supporting documentation you have. If you do not provide sufficient details, you may be sent a deficiency letter seeking additional information.
YES NO
1. Does your claim in any way relate to an entity other
than MF Global Inc. (for example, MF Global
Holdings Inc., MF Global Finance USA Inc. or
another MF Global subsidiary)?
o o
2. Has there been any change in your account since
October 31, 2011?
o o
3. Are you or were you a party to a repurchase or reverse
repurchase agreement, or a director, officer, partner,
shareholder, lender to, or capital contributor of MFGI?
o o
4. Are you related to, or do you have any business
venture with, any of the persons specified in item (3),
above, or any employee or other person associated in
any way with MFGI? If so, give name(s).
o o
5. Are or were you a person who, directly or indirectly,
through agreement or otherwise, exercised or had the
power to exercise a controlling influence over the
management or policies of MFGI?
o o
6. Is this claim being filed on behalf of a customer of a
broker or dealer or bank? If so, provide
documentation with respect to each customer on
whose behalf you are claiming. o o
7. Have you ever given any discretionary authority to
any person to execute securities transactions with or
through MFGI on your behalf? Give names, addresses
and phone numbers. o o
8. Have you or any member of your family ever filed a
claim under the Securities Investor Protection Act of
1970? If so, give name of that broker. o o
IT IS A VIOLATION OF FEDERAL LAW TO FILE A FRAUDULENT CLAIM.
CONVICTION CAN RESULT IN A FINE OF UP TO $50,000 OR IMPRISONMENT OF UP TO FIVE YEARS OR BOTH.