Client Protection - Strength and Security

IBKR's enhanced client protection reduces the risk of clients not receiving a full refund in the event of the firm’s liquidation. At nearly all other broker-dealers, the amount owed to clients is determined weekly or monthly. This poses a risk to clients' funds deposited in the interim, since those firms generally will only protect what was on deposit as of the last time a computation was performed. IBKR determines what is owed to clients and sets aside funds to cover our obligations every business day. In the highly unlikely event of our dissolution, trustees would more easily be able to determine what is owed to each client. At other broker-dealers, trustees would have to re-create the past week of activity which, as evidenced by the Lehman bankruptcy, would substantially delay the remittance of assets.

IBKR'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 IBKR. 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 IBKR 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.

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

By setting aside client funds daily, IBKR ensures that there is segregated cash in excess of the market value of securities rehypothecated to make clients whole. For other broker-dealers that only perform this calculation weekly, client funds and assets are subjected to an increased risk that the firm has not protected its clients for the intraweek use of client assets, which could result in losses to clients.

IBKR reduces clients’ risk by ensuring that the market value of all securities not designated in a good control location are properly segregated in cash on a daily basis. This allows IBKR clients to retain a high level of confidence that it will properly segregate all of their assets. Many other broker dealers will carry the deficit for several days without taking any additional steps to protect clients.

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 IBKR 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, IBKR’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 IBKR 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 IBKR as a safe haven. As a result of IBKR's strong financial position, client equity and client cash increased by 77% and 65% respectively from November 2008-November 2009.