Investor Protection at Interactive Brokers LLC versus Industry Standards
Interactive Brokers LLC (“IBL”) takes a proactive approach to customer protection. IBL determines the
amount of cash and securities owed to customers daily and segregates funds for the exclusive benefit of
customers, along with a large buffer. IBL was the first broker-dealer approved by FINRA to calculate its
customer reserve obligation (under Rule 15c3-3) on a daily basis, while the industry standard is to
perform this calculation on a weekly or monthly basis.
IBL's enhanced customer protection reduces the risk of customers not receiving a full refund in
the event of the firm’s liquidation. At nearly all other broker-dealers, the amount owed
to customers is determined weekly or monthly. This poses a risk to clients' funds deposited in the
interim, since those firms generally will only protect what was on deposit as of the last time a
computation was performed. IBL determines what is owed to customers and sets aside funds to
cover our obligations every business day. In the highly unlikely event of our dissolution, trustees
would more easily be able to determine what is owed to each customer. At other
broker-dealers, trustees would have to re-create the past week of activity which, as evidenced by
the Lehman bankruptcy, would substantially delay the remittance of assets.
IBL applies real-time risk margin requirements to customer accounts, whereas most the rest of the
industry applies end-of-day risk margin. If a customer is deemed to have insufficient assets to cover the
risk of their open positions, IBL typically will perform real-time liquidations of their positions to return
the account to margin compliance. Other broker-dealers often permit customers to carry this risk
over multiple days.
IBL's real-time risk margin requirement and protective liquidations greatly minimize our
customers’ exposure to losses attributable to other customers’ trading, and the risk that customer
losses pose to IBL. The practice of other broker-dealers to calculate risk of the end of the
day increases the likelihood that volatile market conditions could expose their customers to
risk compared to IBL customers in similar market conditions. Firms that do not impose real-time
liquidations, and allow customers to promise to bring in funds at a future date to cover the risk,
expose clients to the credit risk of other customers.
Another major benefit of doing business with IBL is that it does not carry any proprietary inventory.
IBL solely acts as a facilitator for customer trading and does not make any directional bets. Two of the
most significant broker-dealer bankruptcies of the past decade (Lehman Brothers and MF Global) were
caused by the risk generated from proprietary holdings.
Since IBL does not make proprietary bets, the risk of IBL going bankrupt and customer funds being tied up in a liquidation is significantly less than other broker-dealers that which take
proprietary positions. Additionally, IBL’s customers do not have to worry about their broker
making proprietary bets against them.
All broker-dealers are permitted to loan customer securities (called "rehypothecation") if a customer
borrows on margin. When IBL engages in rehypothecation of customer securities, it sets aside 103% of
the market value of customer securities rehypothecated, on daily basis. Most other broker dealers
set aside this money only once a week.
By setting aside customer funds daily, IBL ensures that there is segregated cash in excess of the market value of securities rehypothecated to make customers whole. For other broker-dealers
that only perform this calculation weekly, customer funds and assets are subjected to an
increased risk that the firm has not protected its customers for the intraweek use of customer
assets, which could result in losses to customers.
Similarly, unlike other broker-dealers, IBL segregates cash daily to cover securities owed to
customers that temporarily are not in a good control location 1. This is a common occurrence in the
industry, known as a "segregation deficit". Other broker-dealers may allow these deficits to persist
for several days before taking required action.
IBL reduces customers’ risk by ensuring that the market value of all securities not designated in a good control location are properly segregated in cash on a daily basis. This allows IBL
customers to retain a high level of confidence that it will properly segregate all of their assets.
Many other broker dealers will carry the deficit for several days without taking
any additional steps to protect customers.
Finally, IBL is not affiliated with a bank, which is unlike most comparably capitalized broker-dealers.
Not being affiliated with a bank provides IBL , with a more
stable platform for our customers should a marketwide crisis arise.
Broker-dealers affiliated with banks are subject to further supervision by banking regulators,
which results in additional uncertainty as to who has rights to the assets in the
event of a bankruptcy. Since IBL is not a bank, we believe customers' assets would be returned in
a more timely fashion than for bank- owned broker-dealers. Moreover, in a financial
crises scenario, IBL’s financial resources would be dedicated solely to ensuring the
continued smooth operations of the broker-dealer. Bank-affiliated broker-dealers, on the other
hand, are capitalized by their bank affiliate, and are generally set-up as a subsidiary of a bank
holding company affiliate. Unlike IBL these bank-affiliated broker-dealers are not independent,
self-capitalized entities adding a layer of additional risk for their customers. In a financial
crisis those broker-dealers are competing with their banking affiliates for capital and liquidity.
This could result in the capital being pulled out of the broker-dealer and funds being deployed at
the affiliated banking entity to the detriment of brokerage customers. Lehman Brothers, and
Bear Stearns are historical examples of entities that raided their broker-dealer affiliates for
capital to try to save the banks, which were the root cause of their financial troubles. Both
entities filed for bankruptcy. As a result, their customers experienced significant delays in
accessing their assets and transferring them to an operational broker-dealer.
Indeed, during the height of the financial crisis, while customers were removing funds
and equity from these bank- affiliated broker-dealers, those customers were depositing their
assets with IBL as a safe haven. As a result of IBL's strong financial position, customer equity
and customer cash increased by 77% and 65% respectively from November 2008-November