unnamed ET member, in PM, wrote on 11-03-05 02:31 PM:
Hi,
I have read your post about FDIC & SIPC. May I ask something about fund protection?
I am a retail futures trader with an account at Interactive Brokers. I also wonder what would happen to my capital if IB went broke.
If I do not take it wrong, FDIC would not provide much protection to my capital, not to mention SIPC, even though customer funds are separated from IB's operational funds. Does this mean I would have to wait in the queue as an unsecured creditor?
Is there a way to get around this problem? Does any specific broker separate customer funds into accounts under each customer's name?
Or is it just a risk a trader has to take?
Many thanks indeed.
I posted your PM, but I removed any information traceable to you, so you remain anonymous.
Most of the answer to your question is addressed by my previous posting, in this thread, responding to Ripley.
The rest is as follows.
FDIC will provide absolutely no protection, whatsoever, against a bankruptcy at IB. IB wonât do this, but some brokers will open what is called a fiduciary account, at an FDIC-insured custodial bank, for which you are named, on the bankâs records, as the depositor, and your funds are separate from those of other customers. If such a broker bankrupted, then SIPC would automatically return ALL of your cash to you. If the custodial bank bankrupted, then you would enjoy the full benefit of FDIC coverage. FDIC coverage is superior to that of SIPC, because FDIC is backed by the full faith and credit of the federal government, but SIPC is backed only by less than $2 billion dollars, so if this amount is exhausted, SIPC would leave you naked, unless Congress acted to replenish SIPC; and in a financial crisis, Congress might find itself unable to do so.
SIPC, and IBâs Lloydâs of London policy, as discussed in my response to Ripley, will partially protect you in the event of IB bankrupting.
If IB, or any other broker goes bankrupt, then any cash or property marked, in its records, as âcustomer propertyâ, but not specifically segregated and tagged to one particular customer, would be divided between all the customers on a pro rata basis, to the extent possible to satisfy any deficit owed to them as a result of a bankruptcy. This is an important benefit to customers, because it gives them a preference, in bankruptcy proceedings, over other creditors in regard to âcustomer propertyâ.
If, however, cash or property is marked specifically as belonging to a specific customer, then, instead of a pro-rata disrtibution, that property will be returned to its specific customer-owner (as described for cash above). This would be an even stronger preference in bankruptcy. IB doesnât hold customer property in this way. IB holds securities in âstreet nameâ, meaning that IB records itself as the legal owner, and maintains internal records as to how many of its stock shares, for the same stock, belong to each different customer. Most brokers will hold securities in âstreet nameâ, at least if those securities are in a margin account. If you want to maximize your protection againt broker bankruptcy, you need to find a broker who will NOT hold your securities in âstreet nameâ, because âstreet nameâ ownership results in a pro-rata distribution, which is less favorable to you than simply getting back all of your shares.
IB doesnât use fiduciary accounts, and it holds securities in âstreet nameâ, so if IB bankrupts, you will first enjoy the benefits of SIPC coverage, and IBâs Lloydâs coverage, and then, if you are still not made whole, you and the other jilted customers will receive a pro-rata distribution of whatever customer property is available to satisfy the deficit. If this is not sufficient, then you would have to get in line with the other general unsecured creditors in bankruptcy.
Protection for securities accounts is much stronger than it is for futures accounts. Protection for spot retail FX accounts, other than at IB, is non-existent. This is why Refco FX account holders canât get their money back.
