As far as I understand, european based traders's accounts are not with IB UK, but also with IB LLC: From what I read in my statement: "Interactive Brokers (U.K.) Ltd. ("IB UK") acts as agent in transactions in securities, exchange-traded commodity futures and options, and foreign currencies. For transactions in these products, IB UK.s U.S. affiliate Interactive Brokers LLC ("IB LLC") provides trade execution, Client Money and Custody Services. IB LLC holds Customer money, securities, or other assets under the rules of the U.S. Securities and Exchange Commission ("SEC") and the U.S. Commodity Futures Trading Commission ("CFTC"), as applicable. For assets held with IB LLC, different practices for the separate identification of Customer's money, securities, and assets may apply and, in the event of a default of IB LLC, Customer's money, securities and assets may be treated differently from the position that would apply if the money, securities or assets were held in the United Kingdom. IB LLC is a member of the U.S. Securities Investor Protection Corporation ("SIPC"). A financial statement of Interactive Brokers LLC is available for your personal inspection at www.interactivebrokers.com or at its offices, or a copy of it will be mailed upon your written request." So it's a little irrelevant wheter IB UK is regulated by the FSA or something else.
What if the retail customer position leaves the customer with a cash surplus and no margin loan. But the trade requires margin. Is the amount of margin extended for that trade a liability on IB's books? Is the amount of the liability equal to the amount of leverage extended?
Contrary to expectations, I have finally received a response to my three questions posed to IB a couple of weeks ago and forwarded to their Compliance Department. Are they watching? The first response (concerning arbitration) is not well explained and consequently seems disingenuous because plainly there has been a policy change that is ambivalently conveyed in their current T&Cs. It's not our primary concern here, but the bottom line now seems to be that if you don't accept binding arbitration, overriding your statutory right to go to law, then you won't be trading with IB. I reproduce the email narrative in full. It is the second point that seems to be as close to an answer to the topic of this thread "from the horse's mouth" as we yet have: "In answer to your queries, please find answers below. 1. Futures Arbitration agreement; Customers need to sign the arbitration agreement. Declining the arbitration agreement (as previously allowed) would significantly limit the ability of the customer to trade futures contracts. 2. Within the framework of your customer agreement, your assets will be held with a clearing broker, in the United States of America, Interactive Brokers LLC (IBLLC). This arrangement with IBLLC has been arranged by Interactive Brokers (UK) Limited (IBUK). Each of these Interactive Brokers companies (IBLLC and IBUK) is regulated and the subject of investor compensation schemes. Were either or both of them to default on their obligations, claims by investors could be made, in the case of IBLLC, on the US Securities Investor Protection Corporation (SIPC) and, in the case of IBUK, on the Financial Services Compensation Scheme (FSCS). In the event that an investor's claim on SIPC was not fully satisfied, it is possible that some or all of the unsatisfied part of the investor's claim could be recovered from the FSCS, provided that IBUK was, in common with IBLLC, in default. SIPC cover is included at the following hypertext link http://www.sipc.org/ http://www.sipc.org/how/covers.cfm This protection is provided by the Securities Investor Protection Corporation (SIPC) and Lloyd's of London insurers. SIPC provides the first $500,000 per customer (including up to $250,000 for cash). Additionally, IBLLC's LLC excess SIPC policy with Lloyd's of London insurers for up to an additional $30 million (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million. Please refer to more detailed information regarding this on our site at: http://www.interactivebrokers.com/en/p.php?f=ibgStrength&p=a&ib_entity=uk under account protection. FSCS cover is included at the following hypertext link http://www.fscs.org.uk/ 3. No it is not yet possible for a U.K. Resident to open an account directly with IBLLC which is our US affiliate company. Kind regards UK Compliance Team Interactive Brokers (UK) Limited One Carey Lane London, EC2V 8AE United Kingdom Website: www.interactivebrokers.co.uk Authorised and Regulated by the FSA" Stay tuned to the MF Global story to see what exactly did happen there and how these various customer protections work in practice. A propos the thread topic: could what happened at MF happen to IB? I suppose the honest answer has to be: "sure it could". IB may not presently be trying to become Goldman Sachs but it sells itself inter alia on providing customer loans and is closer to the primebrokerage end of the spectrum in terms of customer/broker relationship. There are alot of moving parts under IB's control. Maybe MF Global casualties will eventually get all their money back. However,that looks like cold comfort if meanwhile their open positions are transferred undermargined and they are left totally out their cash and kept in the dark for an anxious and indefinite period.
The amount of margin is never a liability to IB, is always an asset, the loan. And all the cash u have in your account is an IB liability - even though they can't use it to make loans, it's segregated for regulatory purposes. It works like this: suppose IB doesn't have anything else. You open an account and deposit 1000 USD. 1000 goes to IB liabilities, and 1000 for assets. Then you buy another 1000 in stock with a margin. IB now has 2000 in assets (1000 for "Margin loan", another 1000 for maybe "Margin collateral" instead of giving a name like "Cash on hand"). And 2000 in liability - your initial 1000 (maybe renamed to "cash pledged as collateral" instead of "deposit" and another 1000 which IB had to borrow somewhere else)
Thanks Hedgehog1, great post. My interpretation from all this is that the ultimate effect is about the same, UK clients will keep on ultimately rely on SIPC and US regulations, because IB UK doesn't seem to actually hold any customer asset, it merely has an arrangement with IB LLC to handle custody. Ultimately the FSA guarantee may provide UK clients with an additional guarantee, it's always better to have one more.
True what u said, but keep in mind that the way things are structured, if the actual bets are only held at Timber Hill, then if Timber Hill defaults it has nothing to do with the brokerage arm. maybe there will accrue some liabilities to the IB Holding company, which may decide to sell the brokerage arm to pay for it, but that's entirely different from IB LLC (The brokerage arm) entering into default. Even if IB LLC defaulted, the way a failure of an FCM was normally handled to date would not make it problematic for clients, except the inability to trade. But what happened with MF Global is much worse, it not only got broken in so many ways, but also apparently dipped into clients money accounts and now the money is missing - we are talking about plain fraud here, that's a different issue from MF Global default per se. And much more important, the outcome of all this may decide the fate of the futures industry.
Hedgehog1, would you expand on the Illinois comment? Are there different FCM customer agreements for IL residents?