In light of what is happening with the US Banks, if you are a client of Interactive Brokers LLC (IBKR) or Interactive Brokers Singapore (IBSG), you might wonder about your brokers when compared to the situations of these US Banks.
I hold my securities and cash mainly in both IBKR and IBSG.
Interactive Brokers Group has over $11.6 billion in equity (12/31/22 equity), comprised of highly liquid assets, primarily cash in banks and reverse-repos collateralized by US Treasury securities.
Here is the other information regarding their financial health and incentives.
Interactive Brokers’ Exposure to Distressed Banks
Interactive Brokers do not have exposure to:
- Silicon Valley Bank
- First Republic Bank
- Signature Bank
IBKR also updated that they did not have material margin loan losses due to the client’s holdings in SVB or other banks’ failing values.
How IBKR Manages Client’s Money
IBKR earns the majority of their revenue from:
- Margin loans from trading.
- Investing your excess cash in the accounts at a spread above the cash.
Under IBKR’s Financial Strength, they give us an idea of how they house the money.
Our money is in three places:
The majority is invested in U.S Treasury Securities.
These are direct investments in:
- Treasury bills
- Treasury notes
- Reverse repurchase agreements, where collateral received is in the form of U.S Treasury securities. Transactions are conducted with third parties and guaranteed through a central counterparty clearing house. The collateral is held by IBKR at a custody bank in a segregated Reserve Safekeeping Account for the exclusive benefit of clients
As of 10 March 2023, this is about 78% of clients’ funds.
Interactive Brokers LLC’s $32 billion (segregated customer securities on 12/31/22) portfolio duration is 30-40 days. When rates rise, IBKR’s portfolio re-investments will adjust for a higher rate in about a month.
This way, they can avoid mismatching the maturities between their on-demand obligations to their clients and their investments. This practice also allows IBKR to avoid excessive price volatility and the risks of large losses stemming from declines in investment values that longer-term securities may exhibit.
In contrast, SVB’s portfolio duration was 5.7 years (as of 12/31/22), with an average interest rate of 1.6%.
As interest rates rose, the value of their long-maturity securities fell; when SVB was then forced to sell them at a loss to meet customer withdrawals, that previously unrealized loss became realized and reportable.
Some are Maintained due to Client’s Margin Lending
Client cash is maintained on a net basis in the reserve accounts, which reflects the long balances of some clients and loans to others.
To the extent any one client maintains a margin loan with IBKR, that loan will be fully secured by stock valued at up to 140% of the loan.
The security of the loan is enhanced by IBKR’s conservative margin policies, which do not allow the borrower to correct a margin deficiency within days, as permitted by regulation. Instead, IBKR monitors and acts on a real-time basis to automatically liquidate positions and repay the loan. This brings the borrower back into margin compliance without putting IBKR and other clients at risk.
Special Reserve Accounts
These is the special accounts that was previously talked about.
A portion (9% of clients’ funds as of March 10, 2023) is deposited primarily with large U.S banks in special reserve accounts for the exclusive benefit of IBKR’s clients. These deposits are distributed across several banks with investment-grade ratings to avoid concentration risks.
No single bank holds more than 5% of total client funds held by IBKR.
As of March 2023, the following banks held deposits from IBKR (this list is subject to change over time at IBKR’s discretion):
- Bank of the West (part of the BMO family)
- BMO Harris Bank, N.A.
- CIBC USA
- Citizens Bank
- Standard Chartered Bank
- Truist Bank
- US Bank, N.A.
- Valley National Bank
Certain banks, which are affiliates or branches of foreign financial institutions, are subjected to regulatory oversight by the Federal Reserve and the Office of the Comptroller of the Currency.
IBKR Marks to Mark Their Portfolio – Their Losses
As of Dec 2022, the investment portfolios of the client is $32 billion (under segregated customer securities in the financial statements).
IBKR as a broker, must mark to market its portfolio and they do so on a daily basis. The market value is reported to regulators. This is also published in IBKR’s quarterly financial statements.
You can review their monthly report to regulators here at FOCUS.
The losses on the portfolio are reported transparently under other income and is a tiny portion of $32 billion.
In contrast, the banks are not required to mark their investment portfolios to market if they are classified as “held to maturity” but can keep their securities on their books at their carrying value. This results in hidden losses unless they are forced to sell to generate liquidity.
Here is how long Silicon Valley Bank’s available-for-sale and held-to-maturity duration was:
IBKR’s Owners Have A Lot of Skin in the Game
If there is doubt about incentives, public investors are really the minority interest in IBKR. Thomas Peterffy, the chairman and owner of IBKR, owns 75.5% of IBKR.
If this melts down, he melts down harder.
Currently, IBKR has no long term debts and held no CDOs, MBS or CDS.
I will update more information as I know more.
You can find more information about the strength and security of both IBKR and IBSG here:
- IBKR: https://www.interactivebrokers.com/en/general/financial-strength.php
- IBSG: https://www.interactivebrokers.com.sg/en/general/financial-strength.php
- IBKR’s 2022 10K: https://investors.interactivebrokers.com/en/index.php
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Saturday 18th of March 2023
Though unlikely, it would be good to know what happens to the share/stock/securities purchased using IBKR, IBSG platform, in the event where Interactive Brokers collapses.
Saturday 18th of March 2023
Hi Ming, likely a broker custodian is someone who maintains a ledger book on a continual basis. they maintain the buy, sells and all those sort of stuff. when these stuff happens, those paper assets should be ok because it is under your name, unless it is otherwise in a different relationship