Interactive Brokers Australia ("IBA") takes a proactive approach to customer protection. IBA determines the amount of cash and securities owed to customers daily and segregates funds for the exclusive benefit of customers in bank accounts correctly identified as client segregated accounts as defined under the Corporations Act 2001.
IBA performs a reconciliation of customer money at least daily to ensure that customer 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 customers. Customer-owned, fully-paid securities are protected in accounts at depositories and custodians that are specifically identified for the exclusive benefit of customers. IBKR reconciles positions in securities owned by customers daily to ensure that these securities have been received at the depositories and custodians
IBA applies real-time risk margin requirements to customer accounts, whereas many other broker-dealers apply an end-of-day risk margin. If a customer 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 customers to carry this risk over multiple days.
IBA's real-time risk margin requirement and protective liquidations greatly minimize our customers’ exposure to losses attributable to other customers’ trading, and the risk that customer 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 customers to risk compared to IBA customers in similar market conditions. Firms that do not impose real-time liquidations, and allow customers to promise to bring in funds at a future date to cover the risk, expose clients to the credit risk of other customers.
Another major benefit of doing business with IBA is that it does not carry any proprietary inventory. IBA solely acts as a facilitator for customer 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 customer funds being tied up in a liquidation is significantly less than other broker-dealers that which take proprietary positions. Additionally, IBA’s customers 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 customers 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 customers' 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 customers. 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 customers. Lehman Brothers, and Bear Stearns are historical examples of entities that raided their broker-dealer affiliates for capital to try to save the banks, which were the root cause of their financial troubles. Both entities filed for bankruptcy. As a result, their customers experienced significant delays in accessing their assets and transferring them to an operational broker-dealer.
Indeed, during the height of the financial crisis, while customers were removing funds and equity from these bank-affiliated broker-dealers, those customers were depositing their assets with Interactive Brokers as a safe haven. As a result of Interactive Broker's strong financial position, customer equity and customer cash increased by 77% and 65% respectively from November 2008-November 2009.