Security Lending Protection

Appreicate that there are previous threads on this but I think the devil is in the details and I’m hoping that these can be shared so we can better assess the counterparty risk (Trading212 mentioned it is extermely low but haven’t provided any rationale to back that up).

102-105% cash collateral MTM daily is all good until you have stocks going up 40x in a day - imagine if that happens systematically across the market for a factor. Short sellers on heavily shorted stocks default and IB customers start a run on the shares on rumours.

Is there a cap on % of securities owned that can be lent out by IB? What kind of stress run-on-the-broker scenario can the arrangement weather? In a case of counterparty default, does IB / Trading212 have an obligation to make whole share owners?

You can read more here, especially pages 2 and 3:

https://ndcdyn.interactivebrokers.com/Universal/servlet/Registration_v2.formSampleView?file=SecuritiesLendingDisclosure.html

There is lots of diversification that should reduce risk. IB lend shares through different affiliates and there are many instruments that they lend. Also, as any one time they lend only a fraction of their total stock holding in an instrument. My understanding is that it would take a major sudden meltdown of the entire market to cause a default to IBKR because of the share lending. If an event big enough to cause that (asteroid hits earth, nuclear war is launched) then we probably have more important things to worry about. I also don’t feel that as the smallest of fish I would ever be able to assess the counterparty risk to such fine extent that I would find a sufficient reason to not use Trading 212 as a broker while knowing that there are 100,000s of other investors who are content with the IBKR yield enrichment program.

Thanks Richard. p.2 confirms my concern - IB’s liability is limited to the collateral (“collateral delivered to you may constitue the only source of satisfaction of IB’s obliation”).

I don’t agree with your end of the world analogy - it just takes a violent technical dislocation (are we really new to stocks rallying 10x+ intraday in 2020?) to trigger short seller defaults, which is why understanding the downside protection matters.
I agree it is not possible to fully evaluate counterparty risk, but this doesn’t mean we shouldn’t be informed about the basics. Trading212 should be able to explain why the risk is negligble as opposed to asking us to take their word for it:

What is the typical / limit ‘fraction’ of total stock hodling that can be lent?

Could you give an example of what kind of stress scenario IB will be able to handle before a failure to deliver?

  • Are there any additional guarantees from IB / Trading212 in the case that IB cannot deliver the security (e.g. stock went up 20x, short sellers default, a lot of owners try to redeem and sell)

As a side note, hundreds of thousands of investors also piled into Hertz, so not sure why this gives you any peace of mind. There may be some additional protection from too big to fail (e.g. Blackrock / Vanguard ETFs), which IB is not! Government is much less likely to bail out "100,000"s of IB yield enrichment investors. If you feel it is too ‘complex’ to do some basic understanding on protection of capital in a stress scenario, then maybe investing is not for you…

@David would you be able to help elaborate on this?

@freezefrank

  1. What is the typical / limit ‘fraction’ of total stock hodling that can be lent?
  • Everything, there’s no limit. If there’s demand, it’ll be lent out.
  1. Could you give an example of what kind of stress scenario IB will be able to handle before a failure to deliver?
  • They’ve been able to handle everything happened thus far, which is quite impressive, considering what’s happened in the markets. Never since the service has been initiated have they had trouble meeting obligations.

Thanks david. What about the third point? * Are there any additional guarantees from IB / Trading212 in the case that IB cannot deliver the security (e.g. stock went up 20x, short sellers default, a lot of owners try to redeem and sell)

From your responses it doesn’t seem like the risk of not getting shares back is negligible. Just so we have a better understanding, could you clarify why you think the risk is low? (except the fact that there’s been no issues for the few years IB has been running it for… )

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