Avoiding Broker Insolvency
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Avoiding Broker Insolvency


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Created March 21st 2020 by Joshua1984
Updated March 31st 2020 by Ironbeam
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Avoiding Broker Insolvency

  #1 (permalink)
Montreal, Quebec/Canada
 
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Hello,
Does anyone have an approach in terms of avoiding brokers becoming insolvent and safeguarding their funds? Did you move your funds out of your broker to your bank account? Is there a good way to gauge which brokers are more susceptible? What are best practices?

Andreas Clenow often suggests in his books that it is irresponsible to just have cash in one's account and suggests holding G7 government debt. Do any futures brokers offer access to those instruments?

"In the end, everyone thinks that they have money in the bank but itís all the same money, and the illusion only works until everyone wants to get their money out at the same time. This of course never happens, unless the bank is about to go bankrupt or there is a perception that the bank might go bankrupt, in which case it becomes a self-fulfilling prophecy. What you need to understand about this is just that cash held with a bank is not secure and will be exposed to counter party risk against said bank. If the bank goes belly-up, you will probably lose all your cash. Still, you do need some cash on the books and a reasonable amount of counter party risk is the cost of doing business, but you should pick your broker well and not keep too much cash lying around for no reason.

Exactly how you keep this excess cash is something you need to think through and plan. I recommend sticking only to government debt with top tier countries, preferably in your base currency, because it is not worth increasing risk to get a few extra basis points from lesser creditors. If you place the money only with the government who controls your fundís base currency, or in the case of the Euro the most trusted of the member nations, your risk level is almost nonexistent. Regardless of the state of a nationís economy, a G7 nation will pay back debts in its own currency, because they own the printing presses. The exception is of course the Eurozone, but the strongest nations are still considered quite safe."


Clenow, Andreas F.. Following the Trend: Diversified Managed Futures Trading (Wiley Trading) . Wiley. Kindle Edition.


Last edited by Joshua1984; March 21st, 2020 at 07:27 AM. Reason: Added more info
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  #2 (permalink)
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In United States, for margin accounts:

The cash deposited on these margin accounts is insured by FDIC or SIPC?

For instance, if you have a margin account (for trading futures) with Interactive Brokers, and suddenly IBKR goes bankrupt, is the cash protected/insured in some way?

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  #3 (permalink)
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I would love to know the answer to this. As a Canadian it's probably no.

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  #4 (permalink)
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  #5 (permalink)
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Good, I've just read the article.

If I'm not wrong the cash deposited in a margin account is protected by SIPC when this cash is not held as margin for a futures contract traded.

That's to say ... If I buy an ES contract and the margin requested for the broker is let's say US$ 15.000 .... well, this money is not protected by SIPC as long as I hold the futures contract ...

On the other hand ... If I have a margin account but I still didn't trade any futures contract, that's to say I only have cash in my account ... well, in that case the money would be protected by SIPC in case of bankruptcy of the broker ...

Am I right?

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  #6 (permalink)
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Clientsecurities accounts at Interactive Brokers LLC are protected by the Securities Investor Protection Corporation ("SIPC") for a maximum coverage of $500,000 (with a cash sublimit of $250,000) and under Interactive Brokers LLC's excess SIPC policy with certain underwriters at Lloyd's of London 1 for up to an additional $30 million (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million. Futures and options on futures are not covered. As with all securities firms, this coverage provides protection against failure of a broker-dealer, not against loss of market value of securities.

https://www1.interactivebrokers.com/en/index.php?f=2334&p=acc

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  #7 (permalink)
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From the Wikipedia article on SIPC. Note the second paragraph, which addresses futures. They are not covered.


Quoting 
The SIPC serves two primary roles in the event that a broker-dealer fails. First, the SIPC acts to organize the distribution of customer cash and securities to investors. Second, to the extent a customer's cash and/or securities are unavailable, the SIPC provides insurance coverage up to $500,000 of the customer's net equity balance, including up to $250,000 in cash.[9][10] In most cases where a brokerage firm has failed or is on the brink of failure, SIPC first seeks to transfer customer accounts to another brokerage firm. Should that process fail, the insolvent firm will be liquidated.[11] In order to state a claim, the investor is required to show that their economic loss arose because of the insolvency of their broker-dealer and not because of fraud,[12] misrepresentation,[13] or bad investment decisions. In certain circumstances, securities or cash may not exist in full based upon a customer's statement. In this case, protection is also extended to investors whose "securities may have been lost, improperly hypothecated, misappropriated, never purchased, or even stolen".[14]

While customers' cash and most types of securities - such as notes, stocks, bonds and certificates of deposit - are protected, other items such as commodity or futures contracts are not covered. Investment contracts, certificates of interest, participations in profit-sharing agreements, and oil, gas, or mineral royalties or leases are not covered unless registered with the Securities and Exchange Commission.

Source: https://en.wikipedia.org/wiki/Securities_Investor_Protection_Corporation

Futures contracts are not "securities," basically. So you're on your own.

Bob.

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  #8 (permalink)
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Pa Dax View Post
Clientsecurities accounts at Interactive Brokers LLC are protected by the Securities Investor Protection Corporation ("SIPC")

A cash account is a "security account", isn't it?

What about a margin account? Is it the same as a "security account"?

I'm not sure if IBKR in its site when referring to "securities accounts" is talking about only of cash accounts ... or if this concept of "security account" is the same as a margin account too ...


I ask this because with a margin account I am able to buy securities too .. that's why I have this doubt ...

Thx

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  #9 (permalink)
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Blaster666 View Post
A cash account is a "security account", isn't it?

What about a margin account? Is it the same as a "security account"?

I'm not sure if IBKR in its site when referring to "securities accounts" is talking about only of cash accounts ... or if this concept of "security account" is the same as a margin account too ...


I ask this because with a margin account I am able to buy securities too .. that's why I have this doubt ...

Thx

It depends whether you are using margin. That is if you have a leveraged position on or not.

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  #10 (permalink)
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Pa Dax View Post
It depends whether you are using margin. That is if you have a leveraged position on or not.

Sent using the futures.io mobile app

Currently I have a cash account with ibkr.

My idea would be to change it to a margin account.

Then doing intraday with micro futures ... small trades in small ranges of time (minutes, seconds) ...

The rest of the time I would be in full cash ... that's why my doubt about this cash would be insured or not by SIPC/FDIC ...

Thx

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