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Prime broker or reguard brokerage going bankrupt


hyten1
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this make me think? does people worry about their broker/brokerage/prime broker going belly up? how do you protect yourself from suck a thing.

 

For this reason, I chose one of my brokers as one the largest banks in Canada (this one is a cash account, not margin).  To reinforce this, cash and securities are protected against broker insolvency by CIPF up to $1million per separate account (I believe tax-free retirement accounts and taxable accounts are considered separate).

 

If required to rely on the CIPF coverage I expect there would be major market dislocations that I would wish to take advantage of.  Rather than wait for CIPF settlement (and lack of access to my capital) in the event of insolvency; I decided to maintain two brokerage accounts with the hope that I might be able to recognize problems ahead of the crowds and transfer my securities or cash out or to the other broker before the sh#t hits the fan at an insolvent broker.

 

I have not invested in anything that relies solvency of my broker to guarantee return of principal.

 

 

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this make me think? does people worry about their broker/brokerage/prime broker going belly up? how do you protect yourself from suck a thing.

 

For this reason, I chose one of my brokers as one the largest banks in Canada (this one is a cash account, not margin).  To reinforce this, cash and securities are protected against broker insolvency by CIPF up to $1million per separate account (I believe tax-free retirement accounts and taxable accounts are considered separate).

 

If required to rely on the CIPF coverage I expect there would be major market dislocations that I would wish to take advantage of.  Rather than wait for CIPF settlement (and lack of access to my capital) in the event of insolvency; I decided to maintain two brokerage accounts with the hope that I might be able to recognize problems ahead of the crowds and transfer my securities or cash out or to the other broker before the sh#t hits the fan at an insolvent broker.

 

 

 

If you have chosen one of the big 5 banks, then CIPF is effectively irrelevant.  The fund itself is relatively small and would not even come close to making investors whole if the brokerage arm of RY, BNS, BMO, TD or CM were to fail.

 

However, you effectively have a better guarantee through the federal government.  In Canada, all of the big 5 banks fall under the "too big to fail" category.  The federal government would be completely lynched if they allowed any of those big 5 to flounder.  Now here's the rub:  consumer confidence is key.  If ANY portion of the Royal Bank runs into trouble, there will be problems in ALL parts of RY's operations.  In particular, if I hear that Royal Bank Direct Investing has hit a really rough patch and might not make it, I will certainly move my chequing and savings accounts to some other institution as a preventative measure against the mess spreading to the retail operations.  In effect, trouble in a big-5 brokerage is likely to trigger trouble in the retail banking division, implying that the federal government effectively cannot allow any division of a big bank to fail.

 

However, the CIPF could potentially have value if you do business with some other smaller, more obscure brokerage (ie, IB, Qtrade, etc).

 

 

SJ

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  • 10 years later...

wow this article really make me think http://www.bloomberg.com/apps/news?pid=20601087&refer=top_news&sid=aNFuVRL73wJc regarding hedge funds still waiting to get their money back from lehman prime brokerage.

 

this make me think? does people worry about their broker/brokerage/prime broker going belly up? how do you protect yourself from suck a thing.

I chose a broker that belongs to the fully public national bank. My bet is that if sh*t hits the fan, the government (as sole shareholder) will not let it go broke.

 

Edit: this thread reminded me that I had to have a look at their annual report. Seems like their common equity tier 1 is 41.5%, and their loans to clients fell from 260M to just 7M for a 370M equity and 11M 2018 net income.  Kind of harder to go bankrupt now :) lucky me... I had been procrastinating...

 

Edit2: I don't know very well how to evaluate a bank risk, but seems to me these are good data

 

Edit3: didn't notice this is a 10 year old thread. It is always a current subject, though

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Guest cherzeca

I wonder if anybody knows the potential risks of Interactive Brokers as a prime broker?

 

the principal shareholder, peterffey, is very interested in his reputation (which is stellar).  I wouldn't think he would walk away

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