How do they do margin lending in Canada then? Also large Canadian banks were listed as among the supposed largest hyper-hypothecators in the (flawed) Reuters article.
The determination as to what securities, if any, a broker has a lien upon and may hypothecate in a securities account is based upon a review of end of day settled balances. If you day trade and hold no open positions at the end of the day (solely long cash) then there are no securities to which a lien can be attached.
What about: a) long cash b) long some stocks c) short some stocks d) no margin loan Does the customer agreement allow you (IB) to re-hypothecate any of these (a,b, or c)?
The customer agreement simply memorializes what is allowed by regulation and doesn't afford the broker any other rights as they relate to the obligation to protect customer assets. With respect to the hypothecation of long securities (you can't hypothecate a short position as it's a contingent liability, not an asset), you first need to determine whether you have a debit or credit cash balance. To do so, you need to deduct the market value of short positions from your cash balance as those proceeds have been pledged as collateral to the lender of your shares to secure their return. If the result is a debit balance, then long securities up to 140% of the debit are subject to a lien and may be hypothecated. If it's a credit balance, then no securities are subject to a broker lien and all must be maintained in a good control location. Cash credit balances in a securities account may be deposited in a special reserve bank account for the exclusive benefit of customers or reinvested in "Qualified Securities". These are defined as securities issued by the United States or securities in respect of which the principal and interest are guaranteed by the United States. Any investments in Qualified Securities must likewise be maintained in the reserve account.
Thanks. Is the following example correct according to your post? So if you are: a) long cash: 200k b) long securities: market value 140k c) short securities: market value (100k) d) Margin Loan: 0 Then, in this example, the broker-dealer can choose to re-hypothecate up to the full value of (b)?
No. Under your example, you would deduct the $100k short stock market value from cash (as that cash has been pledged as collateral to the lender since you are borrowing their stock). That leaves you with a remaining long cash balance of $100k. Since you are not borrowing funds to support your long stock position it cannot be hypothecated.
OK. Thank you for clarifying that. So in this example I understand that the account represents a $240,000 liability on IB's books. The cash portion can be reinvested in US Treasury debt but that's it. IB cannot leverage this account for it's own investments or use any component of the cash to collateralize loans other than those associated with the short position. If any of this incorrect please let me know.