Client Protection - Strength and Security

STRENGTH AND SECURITY

Client Protection

Client Protection at Interactive Brokers LLC versus Industry Standards

Interactive Brokers LLC (IBKR) takes a proactive approach to client protection. IBKR determines the amount of cash and securities owed to clients daily and segregates funds for the exclusive benefit of clients, along with a large buffer. IBKR was the first broker-dealer approved by FINRA to calculate its client reserve obligation (under Rule 15c3-3) on a daily basis, while the industry standard is to perform this calculation on a weekly or monthly basis.

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 applies real-time risk margin requirements to client accounts, whereas most the rest of the industry applies end-of-day risk margin. If a client is deemed to have insufficient assets to cover the risk of their open positions, IBKR 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.

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.

Another major benefit of doing business with IBKR is that it does not carry any proprietary inventory. IBKR 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 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.

All broker-dealers are permitted to loan client securities (called "rehypothecation") if a client borrows on margin. When IBKR engages in rehypothecation of client securities, it sets aside 103% of the market value of client securities rehypothecated, on daily basis. Most other broker dealers set aside this money only once a week.

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.

Similarly, unlike other broker-dealers, IBKR segregates cash daily to cover securities owed to clients that temporarily are not in a good control location ¹. This is a common occurrence in the industry, known as a "segregation deficit". Other broker-dealers may allow these deficits to persist for several days before taking required action.

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.

Finally, IBKR is not affiliated with a bank, which is unlike most comparably capitalized broker-dealers. Not being affiliated with a bank provides IBKR , 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 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.

Account Protection

Certain clients of Interactive Brokers Canada Inc. are covered by the Canadian Investor Protection Fund (CIPF).

CIPF’s mandate was established by Canada’s provincial and territorial securities regulators. CIPF is authorized to provide protection within prescribed limits to eligible clients of member firms suffering losses if client property comprising cash, securities, futures contracts, and other property held by such member firms is unavailable as a result of the insolvency of the member firm. It is not within CIPF’s mandate to provide investor protection against any other type of risk or loss. CIPF’s mandate neither guarantees nor protects the value of a security.

For more information about account eligibility, coverage limits, answers to frequently asked questions, etc., please refer to the following website:
www.cipf.ca

Or contact the Canadian Investor Protection Fund at:

Canadian Investor Protection Fund
First Canadian Place
#2610 - 100 King St. W
P.O. Box 481
Toronto ON M5X 1E5

Telephone: 1-866-243-6981
Email: info@cipf.ca

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.

Disclosure

Good Control Location - A depository/custodian that has been approved by the Securities and Exchange Commission (SEC) to hold client assets.