Customer money is segregated in special bank or custody accounts, which are designated for the exclusive benefit of customers of IB. This protection (the SEC term is "reserve" and the CFTC term is "segregation") is a core principle of securities and commodities brokerage. By properly segregating the customer’s assets, if no money or stock is borrowed and no futures positions are held by the customer, then the customer’s assets are available to be returned to the customer in the event of a default by or bankruptcy of the broker.
A portion of customer funds are typically invested in U.S. Treasury securities and FDIC-backed bonds. Although permitted by regulations, given the credit concerns over foreign sovereign debt IB does not currently invest any customer money in money market funds.
As a practice, IB holds an excess amount of its own money in these reserve and segregated accounts to ensure that there is more than enough cash to protect all customers.
Securities accounts with no borrowing of cash or securities
Securities customer money is protected as follows:
A portion is deposited at 13 large U.S. banks in special reserve accounts for the exclusive benefit of IB’s customers. These deposits are distributed across a number of banks with investment-grade ratings so that we can avoid a concentration risk with any single institution. No single bank holds more than 5% of total customer funds held by IB. As of February 29, 2012, the following banks held deposits from IB (this list is subject to change over time at IB’s discretion). Certain banks, which are affiliates or branches of foreign financial institutions, are subject to regulatory oversight by the Federal Reserve and the Office of the Comptroller of the Currency.
-Branch Banking and Trust Company
-Bank of America, N.A.
-Bank of the West
-Citibank, N.A.
-Deutsche Bank AG
-Fifth Third Bank
-HSBC Bank USA, N.A.
-JPMorgan Chase Bank, N.A.
-KeyBank National Association
-Royal Bank of Canada
-SunTrust Bank
-The Bank of Nova Scotia
-Wells Fargo Bank, N.A.
A portion is invested in U.S. Treasury securities, including direct investments in short-term Treasury bills and
reverse repurchase agreements, where the collateral received is in the form of U.S. Treasury securities. These transactions are conducted with third parties and guaranteed through a central counterparty clearing house (Fixed Income Clearing Corp., or "FICC"). The collateral remains in the possession of IB and held at a custody bank in a segregated Reserve Safekeeping Account for the exclusive benefit of customers. U.S. Treasury securities may also be pledged to a clearing house to support customer margin requirements on securities options positions.
A small portion is invested in FDIC-backed corporate bonds, which are held in IB’s customer depository account at the Depository Trust and Clearing Corp. (DTCC).
Customer cash is maintained on a net
basis in the reserve accounts, which reflects the long balances of some customers and loans to others. To the extent any one customer maintains a margin loan with IB, that loan will be fully secured by stock valued at up to 140% of the loan. The security of the loan is enhanced by IB’s conservative margin policies, which do not allow the borrower to correct a margin deficiency within days, as permitted by regulation. Instead, IB monitors and acts on a real-time basis to automatically liquidate positions and repay the loan. This brings the borrower back into margin compliance without putting IB and other customers at risk.
Current SEC regulations require broker-dealers to perform a detailed reconciliation of customer money and securities (known as the “reserve computation”) at least weekly to ensure that customer monies are properly segregated from the broker-dealer’s own funds.
In order to further enhance our protection of our customers’ assets,
Interactive Brokers recently sought and received approval from FINRA (the Financial Industry Regulatory Authority), to perform and report the reserve computation on a daily basis, instead of once per week. IB initiated daily computations in December 2011, along with daily adjustments of the money set aside in safekeeping for our customers. Reconciling our accounts and customer reserves daily instead of weekly is just another way that Interactive Brokers seeks to provide state-of-the-art protection for our customers.
Customer-owned, fully-paid securities are protected in accounts at depositories and custodians that are specifically identified for the exclusive benefit of customers. IB reconciles positions in securities owned by customers daily to ensure that these securities have been received at the depositories and custodians.
Commodities accounts
Commodities customer money is protected as follows:
A portion is invested in short-term U.S. Treasury securities and pledged to futures clearing houses to support customer margin requirements on futures and options on futures positions or held in custody accounts identified as segregated for the benefit of IB’s customers.
A portion is held at commodities clearing banks/brokers in accounts identified as segregated for the benefit of IB’s customers to support customer margin requirements.
As prescribed by commodities regulations, customer funds are subject to real-time protection. IB performs a detailed reconciliation of customer equity on a daily basis to ensure that customer monies are properly segregated. This computation is submitted to the regulators daily.
Securities accounts with margin loans
For customers who borrow money from IB to purchase securities, IB is permitted by securities regulations to utilize for financing purposes up to 140% of the loan value of the stock these customers hold with IB. In simple terms, IB borrows money from a third party (such as a bank or broker-dealer), using the customer’s margin stock as collateral, and it lends those funds to the customer to finance the customer’s margin purchases. Typically, IB lends out a small portion of the total stock it is permitted to lend out.
As an example, at June 30, 2011, IB lent $0.8 billion of customers’ stock out of the $13.0 billion made available to it by margin customers.
When IB lends customers’ stock, it must put additional money into the special reserve accounts set aside for the benefit of customers. In the example above, the full value of $0.8 billion of customer stock that was lent was segregated in the special reserve accounts.
The Importance of Choosing a Safe Broker
In light of the recent bankruptcy of MF Global, customers should understand how it is possible to lose money in the event of their broker’s bankruptcy. Despite all of the protections described above, there are still two ways a customer can lose money without losing it to the market:
If, in violation of the reserve and segregation rules, the broker does not keep some customer monies segregated, either by not putting newly deposited monies in the segregated account or if money is transferred out of segregated accounts for some other purpose, then there can be a shortfall. This may have happened at MF Global.
Customers can lose more money in the market than they hold with the broker. When this happens the broker is obligated to make up the deficit from its own funds. If the broker fails to do so, (i.e., has not sufficient capital of its own to make up for the losses) and SIPC (and, if offered, excess-SIPC) coverage is insufficient or unavailable, then the other customers bear the cost of that shortfall. This, too, may have happened at MF Global.
This is the reason why it is vitally important to choose a broker that has a massive amount of capital and very good, automated credit controls.
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