Client Protection - Strength and Security

STRENGTH AND SECURITY

Client Protection

Client Protection at Interactive Brokers Australia

Interactive Brokers Australia ("IBA") takes a proactive approach to client protection. IBA determines the amount of cash and securities owed to clients daily and segregates funds for the exclusive benefit of clients in bank accounts correctly identified as client segregated accounts as defined under the Corporations Act 2001.

IBA performs a reconciliation of client money at least daily to ensure that client monies are properly segregated from the IBA’s own funds, another way that Interactive Brokers seeks to provide state-of-the-art protection for our clients. Client-owned, fully-paid securities are protected in accounts at depositories and custodians that are specifically identified for the exclusive benefit of clients. IBKR reconciles positions in securities owned by clients daily to ensure that these securities have been received at the depositories and custodians

IBA applies real-time risk margin requirements to client accounts, whereas many other broker-dealers apply an end-of-day risk margin. If a client is deemed to have insufficient assets to cover the risk of their open positions, IBA typically will perform real-time liquidations of their positions to return the account to margin compliance. Other broker-dealers often permit clients to carry this risk over multiple days.

IBA's real-time risk margin requirement and protective liquidations greatly minimize our clients’ exposure to losses attributable to other clients’ trading, and the risk that client losses pose to IBA. The practice of other broker-dealers to calculate risk of the end of the day increases the likelihood that volatile market conditions could expose their clients to risk compared to IBA clients in similar market conditions. Firms that do not impose real-time liquidations, and allow clients to promise to bring in funds at a future date to cover the risk, expose clients to the credit risk of other clients.

Another major benefit of doing business with IBA is that it does not carry any proprietary inventory. IBA solely acts as a facilitator for client trading and does not make any directional bets. Two of the most significant broker-dealer bankruptcies of the past decade (Lehman Brothers and MF Global) were caused by the risk generated from proprietary holdings.

Since IBA does not make proprietary bets, the risk of IBA going bankrupt and client funds being tied up in a liquidation is significantly less than other broker-dealers that which take proprietary positions. Additionally, IBA’s clients do not have to worry about their broker making proprietary bets against them.

Finally, IBA is not affiliated with a bank, which is unlike most comparably capitalized broker-dealers.Not being affiliated with a bank provides IBA, with a more stable platform for our clients should a marketwide crisis arise.

Broker-dealers affiliated with banks are subject to further supervision by banking regulators, which results in additional uncertainty as to who has rights to the assets in the event of a bankruptcy. Since IBA is not a bank, we believe clients' assets would be returned in a more timely fashion than for bank- owned broker-dealers. Moreover, in a financial crises scenario, IBA’s financial resources would be dedicated solely to ensuring the continued smooth operations of the broker-dealer. Bank-affiliated broker-dealers, on the other hand, are capitalized by their bank affiliate, and are generally set-up as a subsidiary of a bank holding company affiliate. Unlike IBA these bank-affiliated broker-dealers are not independent, self-capitalized entities adding a layer of additional risk for their clients. In a financial crisis those broker-dealers are competing with their banking affiliates for capital and liquidity. This could result in the capital being pulled out of the broker-dealer and funds being deployed at the affiliated banking entity to the detriment of brokerage clients.

Indeed, during the height of the financial crisis, while clients were removing funds and equity from these bank-affiliated broker-dealers, those clients were depositing their assets with Interactive Brokers as a safe haven. As a result of Interactive Broker's strong financial position, client equity and client cash increased by 77% and 65% respectively from November 2008-November 2009.

Account Protection

Australian Listed Shares

As disclosed in our Financial Services Guide, among other places, IBA has appointed a third-party sub-custodian, BNP Paribas, to hold securities that you purchase on the ASX or CBOE Australia. This custodial arrangement may impact whether or not you would be entitled to access compensation available under the National Guarantee Fund (NGF) in circumstances prescribed in Division 4 of Part 7.5 of the Corporations Regulations.

The NGF is administered by the Securities Exchange Guarantee Corporation. For more information regarding the NGF, including the claims process, etc., please refer to the following website:

http://www.segc.com.au, or contact Securities Exchange Guarantee Corporation at:
Securities Exchanges Guarantee Corporation Limited
Level 21
Australia Square
264 George Street
Sydney NSW 2000
E-mail:segc@segc.com.au
Phone:02 8216 0231

For information regarding how IB Australia handles client money, details of our professional indemnity insurance policy and other important matters, please consult the IB Australia Financial Services Guide which can be found here:
https://www.interactivebrokers.com.au/en/accounts/forms-and-disclosures-client-agreements.php

U.S.A., Listed Shares

IB Australia custodies certain of your securities positions with its US affiliate, Interactive Brokers LLC ("IBLLC"), which is licensed by the US Securities & Exchange Commission and a member of the US Securities Investor Protection Corporation ("SIPC'). To the extent that your securities (or cash balances, to the extent they are acting as margin in support of a short stock or option position carried by IBLLC) are custodied at IBLLC, they are protected by SIPC for a maximum coverage of $500,000 (with a cash sublimit of $250,000) and under Interactive Brokers LLC's excess SIPC policy with certain underwriters at Lloyd's of London 1 for up to an additional $30 million (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million. Futures and options on futures are not covered. This coverage provides protection against failure of a broker-dealer, not against loss of market value of securities. In the unlikely event it should ever become necessary to assert a claim in a SIPC insolvency proceeding as a result of a failure of IBLLC, Interactive Brokers Australia Pty Ltd will make the claim on your behalf.

Interactive Brokers Business Continuity Plan

In accordance with applicable regulations, Interactive Brokers ("IBKR") has developed a Business Continuity Plan ("BCP") to assist the firm in promptly addressing and responding to the possibility of a future Significant Business Disruption ("SBD"). This plan is designed to mitigate or eliminate the impacts of SBDs of varying scope.

IBKR's BCP was developed using a risk-based approach to identify critical systems and functions and determine the means by which clients will be provided prompt access to their funds and accounts in the event of an SBD. Additionally, the plan describes resiliency and redundancy controls implemented within the systems infrastructure to minimize the potential adverse effects of a disruption.

IBKR's BCP is designed to restore client access to the systems which service funds and positions within 24 hours of a disruption, although recovery time can vary depending on the nature of the disruption, the specific services that have been disrupted or factors outside of IBKR's control.

To review key elements of IBKR’s BCP, please read our BCP Disclosure.