Like SIPC Protection? Set Your IB Sweep To Get It.

UPDATE:

When I checked my IB account this morning all funds (every last dime) had been moved out of the commodities account and into the securities account which of course is SIPC insured. I think the "buffer" applies only when you have open futures or futures options positions and I think even then it is modest beyond margin requirements.


Quote from JamesL:

"Regardless of your choice, IB will generally keep a small buffer of excess margin funds in each account in order to prevent excessive transfers back and forth as your margined securities and futures positions fluctuate in value."

I think this means you won't get a 100% xfer of funds.
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This is a totally inaccurate representation of reality and anyone who understands the concept of Estoppel would get that SIPC does not get second and third bites of the apple. Once they are aware of how their insurance is being portrayed to the public at large and choose to not set the record straight in a PROACTIVE manner over many months (years?) they simply cannot come back later and claim it.

While I am not an attorney I believe that even a mediocre first year law student could bitch slap SIPC's counsel and get summary relief from any federal court in the country and that SIPC would have ZERO basis for appeal. The contention that SIPC needs to approve of anything is just absurd. Again the operative term is estopple which protects one party from being harmed by another party's voluntary conduct. Voluntary conduct may be an action, silence or acquiescence.

The concept is centuries old has vast precedent behind it and is directly applicable to this issue. And more importantly I am done with this issue. Good luck all ... I am 'otta here and done with the thread.

Quote from SteveH:

It doesn't matter if IB automatically sweeps the cash or you do it manually. What matters is whether or not the SIPC is fully aware of this and has approved the process in a legally binding way before anything hits the fan.

Interactive Brokers, or anyone else doing similar things, have zero authority in this matter. Because the SIPC isn't going to say squat until you try to take money out of THEIR pockets.

That being said, I seriously doubt IB is going to pull a "Jon Corzine" or a "Refco" either. Just don't drink the Koolaide thinking that, at this late date and what we know from the MFG fallout, that this "sweep your cares away" marketing pitch actually has any actual legal teeth to it.
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Quote from Swan Noir:

UPDATE:

When I checked my IB account this morning all funds (every last dime) had been moved out of the commodities account and into the securities account which of course is SIPC insured. I think the "buffer" applies only when you have open futures or futures options positions and I think even then it is modest beyond margin requirements.
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That's good news and thx for TOFTT. I guess it makes sense to keep extra cash in the futures end if holding a position, because it does fluctuate rather widely. Nothing has REALLY changed that much then.

Just so long as people are able to move their cleared funds back into SIPC coverage will make alot of people here sleep a little better at night. My IB account has gone dormant so I can't check this myself, and with recent news abt this, it made me NOT want to reopen it.
 
I just discovered this change today and came to ET to see if anyone knew anything about it. I'm not happy that IB snuck this in without telling anyone. They should have had the default be to keep the old treatment and anyone who wanted to change it could.

I've changed it back. If your securities balance is going to be below the SIPC limit, I don't see why anyone would want to leave funds in the futures account.
 
Quote from BobG:

I've changed it back. If your securities balance is going to be below the SIPC limit, I don't see why anyone would want to leave funds in the futures account.
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SIPC may not see your cash as eligible for protection if it is not on deposit in connection with a securities purchase or sale.

Check out page 4 of this comment letter:

http://www.sec.gov/comments/s7-08-07/s70807-16.pdf

"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."

-and-

"By the same token, the close-out of futures contracts and the valuing of options on futures contracts does not yield cash resulting from the purchase or sale of a "security." Margin deposited to secure a futures position is not cash on deposit in connection with a "security" trade."
 
That last post (by Options12) is all the SIPC needs to contest claims if the majority of your market operations has been tied to futures or futures options purchases in the so-called IB global account which gets cash swept to the securities cash side.

Am I going to turn that sweep option on in my IB accounts? Sure, why not. It can't hurt.

But I am unconvinced that a first year law student or a 50 years-experienced lawyer could do squat if the SIPC says NO to all this sweeping biz once it is contested after the fact. You need a definitive statement BEFORE disaster strikes, not some brokerage doing business as usual, confident that they're right with ZERO precedent for the stance they've taken.

The probability of IB having a meltdown is super low, imo. The probability of anyone of us melting down our accounts from too many bad trades is orders of magnitide higher.
 
I have been firmly (vehemently?) on the other side of this debate having never seen any statement of this nature and, relying on estoppel, felt quite comfortable in having the SIPC insurance.

While I have great faith in IB's balance sheet and conservative margin rules I will, tomorrow, take a look at my IB account and tally up my percentage of securities transactions compared to futures. I appreciate the effort Options 12 has put in to bring this to light. IB certainly has not.

Quote from Options12:

SIPC may not see your cash as eligible for protection if it is not on deposit in connection with a securities purchase or sale.

Check out page 4 of this comment letter:

http://www.sec.gov/comments/s7-08-07/s70807-16.pdf

"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."

-and-

"By the same token, the close-out of futures contracts and the valuing of options on futures contracts does not yield cash resulting from the purchase or sale of a "security." Margin deposited to secure a futures position is not cash on deposit in connection with a "security" trade."
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Quote from SteveH:

Am I going to turn that sweep option on in my IB accounts? Sure, why not. It can't hurt.
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But remember that by sweeping futures-related cash to the securities side you might be giving up any CFTC protection of your cash.

So in the unlikely event of a broker liquidation you might find yourself unprotected under SIPA or CFTC regulations.

The National Futures Association addresses cash sweeps here:

http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=9059&Section=9

"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."
 
Quote from Options12:

But remember that by sweeping futures-related cash to the securities side you might be giving up any CFTC protection of your cash.

So in the unlikely event of a broker liquidation you might find yourself unprotected under SIPA or CFTC regulations.

The National Futures Association addresses cash sweeps here:

http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=9059&Section=9

"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."
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Thanks for digging up this info Options12.

Does anybody know specifically what this "preferential treatment" is under CFTC regulations, and what protection commodities accounts have, if any, under CFTC rules?

As far as IB, all I know is they do not co-mingle customer funds regardless of what type of account, but is that the extent of "protection" in an IB commodities account?
 
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