SIPC protection in case of a financial disaster

Discussion in 'Trading' started by jaiko, Aug 16, 2007.

  1. jaiko


    I wonder whether somebody could help me with the following questions.
    My Broker has SIPC protection as well as a Lloyd’s protection insurance.
    I have an individual account and participate in a corporate account too.

    During the last weeks everybody can see that the financial system is not in the best condition , so i cecked the account protection of my broker ( in case of a financial disaster of my broker).
    I read all the phrases about account protection and insurance.
    But I cannot find the answer to some problems:

    1: are individual and corporate accounts to the same extent SIPC protected ?

    2: Are margin accounts less protected by SIPC protection ?
    ( because the broker can lend out your shares )

    3: Is there a risk of loss If I hold stocks or ETFs in an individual or corporate margin account if my broker goes bancrupt?

    By the way I have read on the SIPC homepage that they are funded only with 1000.000.000$ and the Lloyd’s protection is only 150 mil for all accounts together --- sounds like a joke
    In case of a bancrupt of a bigger broker these amounts are ridiculous.

    THX for help

  2. The account insurance up to $150 million for all accounts together is a joke, considering the assets of all the accounts together, which are probably over $10 billion, if the firm goes bust, $150 million spread out over $10 billion means you will probably get about 2 cents on the dollar of insurance for your accounts above SIPC protection. Basically, you have SIPC protection, and anything above that, I wouldn't count on recovering much in a disaster.

    So basically, the Lloyds of London insurance is meaningless. The insurance companies are not stupid, they would not insure the whole asset base, which would be the only way to get full protection (of course considering that Lloyds is a failsafe credit source in such a disaster).
  3. da-net


    Thanks Jaiko! for starting this thread. Perhaps someone can shed some light on something I am reading.

    It's an older book (1975) "Getting Rich in Commodities, Currencies Or Coins- Before Or During The Next Depression" by Robert Vichas. It is a book about commodities and how good they are...and how evil stocks are...the info is a little dated but I could not confirm or deny the information the author states on the SIPC website other than the changed protection limits

    The author states" Stock commission houses can borrow against margined accounts and use these funds to pay ordinary business debts."

    In other words they can use our money to pay their bills!

    He further states "When a stock commission house is forced into liquidation, the stock trader fares little better than ordinary creditors. The new government insurance fund, SIPC only partially protects some stock traders. Carefully reading the law will verify that commodity traders are better protected, through self regulation, than stock traders , in spite so-called government guarantees and regulations.

    The SIPC "guarantees" the safety of investment accounts up to $50K of which a $20k maximum can be in cash. The SIPC does not guarantee profits. Margined accounts are most vulnerable to substantial losses under SIPC forced sellouts of stocks and bonds. SIPC officials confirm that margin customers face the possibility of losing their stocks and bonds , receiving the left over cash instead."

    "Left over cash" !!

    I question if option positions are left untradeable until the expire worthless during forced liquidation which could take months or years if dragged through the courts.

    Is any of this still
  4. john12


    as the above note said each account is insured up to 100k cash and 500k stocks. so one can have an individual,joint and ira acount and EACH ACCOUNT IS INSURED TO THE ABOVE LIMITS. sipc is 99% used for cases of fraud with the broker.lets use ib as an example. lets say the avg account is 100k. i would say 50% of the account is cash and 50% stocks. if the market fell 20% tommorrow there's ample cash in the above account to meet a margin call. if not they'll sell immediately. ib doesn't play. for them to lose a clients money would be very very rare. and i agree the aggregate $150 million is bogus as hell and just for marketing. clients assets are in the many many billions so 150 mil spread out over 10-30 bil is peanuts. ACTUALLY WHEN THE CRISIS STARTED 2 WEEKS AGO I DREW DOWN ALL MY ACCOUNTS UNDER THE 100K LIMIT TO TAKE NO CHANCES
  5. Isn't the 100k in protection on free cash balances? For instance, you have 350k cash in the account, and margin positions require 251k to maintain. Then you are safe all around, right? I'm unfamiliar with this particular calculation. What happens if I put in 251k in a t-bill, and have no positions. Can they confisicate a t-bill? How is that different than stock and option positions?

    Just as an aside, I have an account that had negative buying power of less than 1% of the equity. I am well-known to the clearing firm. Still the account was frozen for the entire trading day, and I could only trade to reduce positions. The clearing firms don't play around, and it's probably best for everybody.

    Also, in 1987 the equity market declined over 22% in a day. I became very familiar with one of the clearing firms that had the most trouble with losses and liquidity. The gummint men showed up and the firm survives to this day. It's still probably a good idea to err on the safe side.
  6. john12


    100k is free cash. if you have 300k and 200k's in stock then the 100k in cash is also protected.i've done treasuries before. all the treasury does is turn your cash to a security.lets say you day trade with 500k and are in cash every can buy a 500k treasury with some brokers and trade against 95% or so of it. so if the broker goes under your 500k is considered a stock so its insured vs a straight 500k cash were only 100k is insured. the treasury is still in street name so you'd still have to go threw sipc. the downside is you can't hold anything overnight against it
  7. fug-ged-aboutit.

    when the mains blow there will be no protection. Your protection will be the gold bars that you bought.
  8. jeez you guys are stupid. the insurance by lloyds covers each account BEYOND the sipc coverage.

    suppose your broker has 5000 accounts, each with $110k cash. so the firm's total customer equity is $550M. if the broker fails, the sipc would cover $100k x 5000 = $500m. lloyds would cover the remaining 50m.

    the broker doesn't need billions in insurance if most of their accounts are small.