I currently have an IB account, but I'm thinking of consolidating all my accounts (including IRA, etc) into IB because of the cheaper commissions. I would like to understand my risk, given the entire MF Global fiasco. I understand that IB has a huge reserve, bigger than basically everyone else, but I want to understand what my risk is. For example, there could be fraud at IB, etc, that could put them at risk. If I have an account in IB from which I day trade futures (am cash at the end of the day), but also trade stocks, is my account covered under SIPC? Or is there some loophole that could leave my accounts exposed to a loss in the case that IB goes through an MF Global-type scenario?
http://www.elitetrader.com/vb/showt...565&perpage=6&highlight=ib sweep&pagenumber=1 My take after reading thru it is this: Money deposited for the use of trading securities is covered by the SIPC. Money deposited for the use of trading futures is not covered.
I've seen people say that if the account is mostly used to trade securities, it will be covered. Until I see something official that defines "mostly" (55%? 80%?), I'm inclined to take the view that even 1 trade on futures in that account allows them to say that it is not a securities account. You then would need a lawyer to contest that. Ergo, make your decision purely on risk assessment. Look at the financials of the brokers and decide.
You should know that MF Global was going to be sold to IB in order to raise cash to back the trade that ultimately went wrong. IB backed right off went it came out that customer funds were unaccounted for. This should give you an idea how IB does business. So far so good.
I think IB is one of the safest brokers out there. Keep in mind that Peterffy is not only the CEO, but also the founder of the company. So it's his life's work. Because of that, he seems quite paranoid about the safety of his company and funds. Just think about how IB uses not only one or two, but at least six different banks where they keep the funds. That said, there is still a risk, as there is always. But if you trade a leveraged instrument like futures, you should always maintain a second account anyway, just in case the main account isn't working. So that you can hedge an open position. If you use options, your second account can be quite small, but you should have one. I would never trade leveraged without a backup account. It's just an unnecessary, additional risk.
IB's single account is actually, for accounting purposes, divided into 'Securities' and 'Commodities' accounts (see the different columns in TWS account window). Funds are automatically transferred between these accounts as needed for margin. It's my understanding that cash in the 'Securities' account is covered by SIPC (up to the limit), as are securities held in that account, but neither 'Commodities' cash nor futures positions are covered. In account management you can have IB automatically sweep excess cash (that not needed for futures margin) into your securities account each night. I personally think IB is the most rock-solid brokerage out there, on par with the money center banks (the former because of genuine risk control, the latter because of TBTF government guarantees), but you just never know. The risk of an MFG or PFGbest is clearly non-trivial and goes up significantly if and when Peterffy retires. The best you can do IMO is use a few different brokers, keep at least a 'start over' reserve outside the financial system entirely (e.g. gold or real estate), make sure you're sweeping into the securities account and keep an alarm on the IBKR stock. Wire everything out immediately if the stock starts dropping significantly, and ask questions later.
How large (dollar value) is your account? If you are up over $100k that's one thing. If you will be under $100k after you consolidate all of your accounts I wouldn't worry about anything at all - at IB or any other broker.
Should read this thread. I just copied some pertinent info. http://www.elitetrader.com/vb/showt...565&perpage=6&highlight=ib sweep&pagenumber=1 Regarding coverage of cash swept into a securities sub-account: "SIPA does not protect all cash in a securities account â only cash for the purpose of purchasing securities. SIPA certainly does not protect cash deposited for the purpose of purchasing commodities. Therefore, cash collateralizing commodities transactions swept into a securities account will not be protected by SIPC." If you trade 95% futures then you should keep your cash in the CFTC sub-account since: (a) your funds from futures trading would not be eligible for SIPC coverage even though they are swept to the securities sub-account. (b) not keeping the cash in the CFTC sub-account would mean that you are giving up preferential treatment of your claim in a bankruptcy.