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How Protected Is Your Capital When Your Broker Fails

I was looking up how much is the protection afforded to U.S. brokerage accounts in the event the brokerage fails. Key points below.

The Insurance

  • Brokerage accounts are protected by the Securities Investor Protection Corp (SIPC), similar to FDIC insurance for bank accounts.
  • SIPC is a non-profit, non-government, membership corporation, funded by member broker-dealers.
  • SIPC will replace for each customer up to $500,000 worth of missing securities, including up to $250,000 in cash (including U.S. dollars and foreign currency).
  • Notes, stocks, bonds, ETFs, ETNs, mutual funds and  other investment company shares, and other registered securities are covered.
  • Options on stocks are covered in the following manner:
    • The option contracts are liquidated, and customers receive the value of those positions on the date of the SIPC filing (which can be different from the liquidation value).
    • (i) Short call positions covered by long underlying positions, and (ii) short put positions covered by long treasury bill positions, will not be liquidated and will be excluded from the calculation for options.

What is Not Covered

  • Futures, commodity (including gold, silver), currency, options on futures, or options on commodity contracts are not covered.
  • Unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts are not covered.
  • SIPC does not protect customer funds placed with a broker-dealer just to earn interest.
  • Insiders of the broker-dealer, such as its, owners, officers, partners, are not customers for SIPC coverage.
  • It is unclear whether cash swept from a futures trading account into a stock trading account is covered.

Additional Insurance

  • Many of the brokerages buy additional coverage for customers’ accounts. So far all of the brokerages I have seen buy additional insurance from Lloyd’s of London, which really makes me think whether it is like the case of AIG insuring CDSes in the past.

Additional insurance for various brokerages:

  • Scottrade:  Up to additional $24.5 million (with a cash sublimit of $900,000).
  • Interactive Brokers: Up to additional $30 million (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million (for IB).
  • E-Trade: Insurance with aggregate limit of $600 million, where the combined return to any customer does not exceed $150 million, and the return of cash to any one customer does not exceed $900,000.
  • TD Ameritrade: $149.5 million of coverage includes a sub-limit of $900,000 on cash. Each client is limited to a combined return of $150 million from SIPC or London insurers. Aggregate limit of $500 million for claims from all TD Ameritrade clients.
  • Charles Schwab: Protection up to an aggregate of $600 million, limited to a combined return to any customer of $150 million, including cash of up to $1,150,000.
  • Firstrade: Protection up to an aggregate of $600 million, limited to a combined return to any customer of $150 million, including cash of up to $2 million.

MF Global

  • CFTC allowed commodity brokers to use customer funds for “safe” investments”, which included sovereign bonds. This has now been disallowed following the MF Global saga.
  • Most commodity brokers have customer agreements which included clauses that allowed them to use customers’ funds as collateral for the brokerages’ own trades, this is known as “rehypothecation”. Customers whose funds were used as collateral, could be considered unsecured creditors if the brokerages fail.

How to Check Whether Your Broker is a SIPC Member




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