It is not at all realistic to expect def to be an instantaneous expert, after U.S. business hours, on until-today obscure issues of re-hypothecation business practices and contract language.. Obviously he needs to check with senior management first before going into detail on that.
this rule has been around for ages,they are most likely all taking advantage, if not on a day to day permanent borrowing from customers,at the very least an occasional safety net on flash crash days so they are not forced to liquidate, even if they are liquidating you,until that rule is changed, and i doubt the banks and congress are going to do anything to protect us that would increase their exposure,this will be a" let me look into it and i will get back to you" topic
Thanks - that is very good to know. He still likely has to check with other managers (and probably the president of the company and maybe lawyers too) on such a specialized and complicated topic. I imagine that IB will be working up a detailed response to the Reuters article since it names Interactive Brokers. It is also being quoted on ZeroHedge and elsewhere. This thread is also linked to in some of the comments on ZeroHedge.
unfortunately, this is how the whole industry operates and to some extent it is the reflection of a fiduciary based currency economy, where money is created out of thin air. the last couple of years, some truths have became quite striking re the financial industry: 1. money could be seized or depreciated by governments anytime; 2. you can't trust any bank with your savings because they run highly leveraged operations that might go bust overnight decimating your funds; 3. brokers love to gamble because that's what their business is all about. we thought they did it just with their own funds but, it turns out, they do it with customer funds too. so, even we were to find a broker that was immune to this illness, where would we find a bank that meet the criteria? and even if, hypothetically, we would fund such a virtuous bank/broker combo, what can we do about the government?
Then he shouldn't have bothered to say anything at all here. His post raises more questions than it answers. He says there is a misunderstanding here of hypothecation, then goes on to say nothing at all to explain it properly. Meanwhile, it's not even hypothecation that is the bugaboo, it's re-hypothecation, as per the Reuters article. That is, when the firm uses the customer's funds and assets to backstop the firm's own trades. The fact that IB is in the mix engaging in re-hypothecation with the other firms that are "too big to fail" is a huge red flag. Because IB is not one of those "too big to fail" firms. And as others here have said, the lack of transparency and further forthcoming information by brokers in light of the MF Global disaster, is genuine reason for concern by the rest of us. And as brokers such as IB and others continue to stay relatively silent or opaque, the more distrust and concern they will sow. The bottom line is that we are living in a time right now where neither the government and regulators, nor the firms themselves, can be trusted. Even if you are SIPC covered, do you really want to be with a firm that is putting your money at risk such that you would have to go through the hellish process of dealing with a collapse and getting your money back from the SIPC? I certainly don't. Truth is, we are now living in an environment where the only party you can trust is yourself. Period. A wise man once said that in a secular bear market, return OF capital is more important than return ON capital. There's a reason during the First Great Depression people stuffed their money in their mattresses and the walls of their homes. If things keep going the way they're going, I suspect we'll see that make a return. Bottom line--caveat emptor. We're on our own, folks.
Well stated, zboy. I must admit it never occurred to me that a FCM could use your account equity to fund their own trading. At the same time, we all knew we got interest in IB accounts, so we had to assume they were using the money to generate enough to cover the interest, presumably by buying T-bills. Now we find that MF and maybe others went way beyond just buying T-bills and were massively speculating in foreign bonds, even against the advice of their own in house risk manager. I have a lot of time for Def, but he has just scratched the surface here.
I have closed my account with IB, When IB show MORE clear STATEMENTS about it, ( THEN ) i'm open another account ... ________________________________________________ Dear Trader, It has come to our attention at the Secure Login Systems department that you have closed your account with Interactive Brokers. We see that your account still has a Security Device attached to it as of . As per the guidelines of the Secure Login System, you must return the PLATINUM(S.No: BXXXXXX) device once the account is closed. Interactive Brokers allows a total of 45 days after account closure for the return to be processed. This should allow enough time to have the device returned to us for proper removal. Once we receive it the frozen 150 USD will be unfrozen on your account. If the device is not received within 45 days of account closure your account will be charged the fee of 150 USD. If you have not yet returned your Security Device please send it securely to the below address . When returning any security device please do so with a courier that provides you with a tracking number, e.g. FedEx, UPS, DHL, or USPS Express. Interactive Brokers, LLC. ATTN: Secure Login Device Returns Two Pickwick Plaza Greenwich, CT 06830
The regulators have looked into it. They've urged broker-dealers to restrain themselves from hyper-re-hypothecation from Monday to Thursday since the calculation used to monitor re-hypothecation levels is only required on Friday. "Carrying broker-dealers are cautioned that taking advantage of the fact that the reserve formula is only required to be computed weekly by using customer assets (cash and securities held in margin accounts) in the interim period to help fund operations can create unacceptable risks. Excessive reliance on this approach may be an indication of funding and liquidity stress. Carrying broker-dealers are encouraged to: - establish and enforce limits on the use of customer cash and the hypothecation of customer securities; and - consider developing contingency plans to prepare for possible customer withdrawal of assets, particularly at an accelerated rate." From page 9 in http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122388.pdf
Nobody gets interest with t-bills at 0.005% or whatever the ridiculous rate is these days. The problem, as has been mentioned in a few posts lately, has a great deal to do with interest income. With rates at historical norms (let's say 5% for argument's sake), the firm can earn that on the cash sitting idle in the account or let's say hypothecate the balances and have that sitting in short term bills. But over the past decade the rules changed and they were allowed to use that money to "invest" in an assortment of different products, some of which could lose value or become very illiquid quite suddenly. Also, let's not forget that shitstorm with Sentinel not more than 4-5 years ago either. Very apropos. ZIRP is going to have proven to be an unmitigated disaster. Just wait until we get an idea of what's going on within the insurance industry, where we are supposed to believe that somehow they will be able to operate into perpetuity with bills earning 0.00% and that they were chasing yield in Eurozone toxic trash. Seriously, it's almost as if people really thought we fixed something after the crisis in 2008. We didn't.