IBKR determines the money owe to clients and set aside funds to cover their client obligations every business day. The competition determines this only weekly or monthly. Why does this matter? In the unlikely event that IBKR goes down, the trustee can more easily determine what is owed to you. Trustees that work with other brokers will have to re-create last week’s activity (which is what happened at Lehman), and that would delay the remittance of assets.
IBKR calculates real-time risk margin requirements to client accounts while the industry only apply end-of-day risk margin. If client does not have sufficient assets to cover risky positions, IBKR liquidate them real-time and return the account to margin compliance. Other brokers might be more lax and permit the clients to carry the risk over many days.
IBKR’s business solely serves its clients and does not do proprietary trading. What you may be most afraid is what brought down well-known broker collapses such as Lehman Brothers and MF Global. The collapse of both firms was caused by the risk generated from proprietary holdings.
To add on to #3, clients would also not have to fear their broker making proprietary bets against them.
IB thinks that not being affiliated with any banks will help them. This is because in times of crisis such as during GFC, the bank-affiliate brokers have to compete with other banking affiliates for capital and liquidity. This is why clients were removing funds and equity from bank-affiliated broker-dealers and depositing their assets with IBKR instead.
It is good that Interactive Brokers try to alleviate potential client concerns about the platform risk and how they are safer.
Do note that while the circular pointed out where the cash and security resides, this does not help much if you are thinking in terms of estate tax considerations because:
Whether your securities are subjected to estate tax depends on the domicile or incorporation of your securities.
Whether your cash are subjected to estate tax depends on if its in a broker that is domcile or incorporated in US and not where the money is held.
Most likely, IB will not provide much help to figure out so you might need to speak to your own tax adviser.
My Comprehensive Interactive Brokers How-to Guides
Interactive Brokers is a great low-cost, financially strong brokerage platform that can be the standard broker for holding your long-term investments. You can access 150 global exchanges, including exchanges such as Singapore, the US, Hong Kong, London, European and Canada.
You will enjoy cheap commissions and zero minimum recurring platform fees or maintenance fees. Convert your funds to different currencies at near-spot rates, paying a flat US$2 fee.
To get started or become familiar with Interactive Brokers, check out my past articles on how to invest with Interactive Brokers. I hope the guides make your life and investing experience easier and brighter.
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.