Account protection of the new entities of IBKR in Europe
IBKR has expanded its European activities through the following three entities: IBIE, IBLUX and IBCE. As part of our Brexit planning, investment accounts held by EU customers at LYNX via IBUK will be migrated to one of these EU entities. In this summary, we would like to point out the safety and protection of clients’ assets as for the new European entities.
Both the financial instruments as the cash of clients are required to be kept separate from the assets of IBKR. IBKR uses a range of banks to safekeep clients’ cash to avoid a concentration risk with any single institution and for securities IBKR uses so-called custodians. These custodians held these securities titled for the benefit of clients. IBKR has a large network of the world’s largest banks and custodians which are actively monitored via an enhanced due diligence process. All entities of IBKR use this network and therefore a migration to a new entity of IBKR will not influence the safety of this set-up. The locations of clients’ cash and financial instruments are at all times visible via clients’ personal account statements.
If financial instruments are financed with margin (extra funds used from IBKR), assets in portfolio may possibly be lent to other financial institutions (for example to facilitate short selling) and deviates from the above custody setup. The counterparty who borrows the shares is obliged to provide funds equal to at least 100% of the market value of the borrowed shares as collateral. Each trading day, the collateral is adjusted based on the market price of the borrowed shares. The funds that serve as collateral must be kept separately by IBKR, and solely for the benefit of clients. This means that the value of the instruments is covered in a scenario where a counterparty can no longer return the loaned instruments.
In the unlikely event of IBKR going bankrupt, creditors will not be able to access the clients’ cash and assets due to the safekeeping of the financial instruments and cash. Only rare circumstances in which the segregation of customers’ cash and assets are not ensured (e.g. fraud) and the financial firm is not able to fulfill its compensational obligations (e.g. bankruptcy), the applicable protection scheme becomes relevant.
Due to the migration, clients will no longer fall under the UK and American protection schemes. Investment accounts at the European entities of IBKR are protected by the European investor compensation scheme for a maximum of €20,000 per investor.
The financial health of a firm is important in order to assess the probability of bankruptcy. IBKR has a distinguishable strong financial strength as one of the largest brokers in the world. On a consolidated basis, IBKR exceeds $8.5 billion in equity capital, which is over $6.0 billion in excess of regulatory requirements. IBKR reported $1.2 billion of pretax profit for 2019 and has no long-term debt. The shareholders of the new entities of IB are the public company, Interactive Brokers Group, Inc. (18.5%) and the firm’s employees and their affiliates (81.5%). Unlike at most other firms, where management owns a relatively small share, at IB they participate substantially in the downside just as much as in the upside. Because of this vested interest, they run the business conservatively. At last, IBKR is listed on the Nasdaq exchange and is rated ‘BBB+ Outlook Positive’ by Standard & Poor’s.
Note: Interactive Brokers LLC (‘IBLLC’), Interactive Brokers U.K. Limited (‘IBUK’), Interactive Brokers Ireland Limited (‘IBIE’), Interactive Brokers Luxembourg SARL (‘IBLUX’), Interactive Brokers Central Europe Befektetési ZRt (‘IBCE’) are owned by Interactive Brokers Group (‘IBKR’).