How do the cash proceeds of a liquidated FOREX trade that are swept into the securities account at IB get treated in an MF Global type disaster?
That cash is in the securities account rather than the futures account and hasn't been sweep in from the futures account. So it's covered by SIPC insurance. Anyone have a different understanding?
The way IB looks at it, forex executions just lead to credit and debit cash balances in various currencies. The nature of these as forex trades in progress is not preserved - the resulting balances are just the same as, and mixed in with, credits and debits in various currencies that originate from cash deposits and withdrawals, stock sales etc. If the user wants to track them as forex trades he can do so using a virtual fx trade position tracking feature, but this can be reset at will and is not recorded on IB's books. Is there an argument that this accounting method is too artificial and not in keeping with the underlying nature of the forex rtade transaction? I think that that case could be made if it ever made a difference (which currently it does not). For example, if there were in some jurisdiction a special transaction tax rate on the profits of forex trades, them IB might have to change to start separating out such trades and tracking them. Could SIPC at some point determine that it was in the business of insuring funds awaiting investment, and not funds awaiting forex trades? Conceivably, so I would suggest doing at least occasional securities trades.
There is evidence to suggest that SIPC has come to that conclusion. My take, like yours, is that securities transaction need to be some part of the mix to be more certain even if not completely certain.
Also consider that in order for SIPC to consider the foreign currency in your account as "cash" eligible for insurance, the securities trades you plan to make in that account in hopes of triggering SIPC coverage should probably be transacted in the foreign currency and not USD. It's worth double-checking Interactive Brokers' characterization of forex coverage directly with SIPC.
Yes, ideally I would suggest buying a few stocks in the foreign currencies you trade. IB offers access to quite a few foreign stock exchanges where stocks trade in currencies other than USD.
Comintel, here's how IB-AN described the reasoning behind IB's forex coverage claim in another thread: http://www.elitetrader.com/vb/showthread.php?s=&postid=3404824#post3404824
Yes this is quite an interesting quote. He says in part: "Unlike spot forex trading elsewhere, transactions conducted through IB are not executed in lots or contracts (which are not SIPC protected) but rather in any whole currency unit as specified by the customer." So he is saying that form governs over substance? The fact that forex transactions executed through IB are book-kept in a slightly different manner than elsewhere is supposedly going to add SIPC protection that would otherwise be absent? Other brokers could gain SIPC protection by slightly altering their bookkeeping method for forex trades? How would that line of argument go over with a court if it ever came to that? Courts specialize in looking beyond the form to find the true substance. So I am doubtful about that particular argument. It is well-intentioned but I do not think it gets you there. All in all, I do think you still have very good odds that SIPC will treat as insured any money in a securities account within the specified limits. IB is trying as best it can to improve those odds a little with its book-keeping methods for forex - and that's all to the good! I think that by doing some securities purchases in the account you can improve them a little further. Of course none of this is ever likely to be important because IB is well-run anyway, but it does not hurt to take every available precaution.
Not at all. What I am saying is that our forex is substantially different from the traditional forex offerings which SIPC does not cover in that it is not a contract (e.g. commodities which specifies future delivery or OTC which relies upon a continuous roll). Rather, we actually deliver the currencies to the account in the quantity as specified at the time of the order and not some fixed contract quantity upon settlement. Moreover, the account holder may withdraw the long balance to their bank account or apply it to purchase securities or meet any other settlement obligation (e.g., futures variation). In addition, it need not be offset or closed out through IB nor is it tied to the currency which was sold. It is simply treated like any other cash balance, including interest debit/credit considerations. SIPC covers cash balances regardless of their currency of denomination. There seems to be some questioning in these forums as to what SIPC coverage actually entails and while their rules don't appear to contain the level of specificity which some are seeking I am not aware of any coverage restrictions which are premised upon the manner in which the cash in the securities account is sourced (including cash deposited from an external bank account, transferred from another securities or commodities account whether in-house or third party or originating from a trade).
IB-AN, You shouldn't be surprised that there is questioning of your claim on this issue. The claim that IB customers are entitled to SIPC protection on their forex trades is highly unique and seems at odds with the definition of "securities" under SIPA Section 78lll(14). Would you at least confirm that IB has cleared this claim with SIPC and that it is not simply your personal analysis of SIPA? That said, does anyone know if there is another broker who advertises SIPC protection of forex trades?