The Denials Begin: Interactive Brokers Is First To Claim It Has Not Engaged In Commingling Rehypothecation

Tyler Durden's picture

Now that the rehypothecation bogeyman has been let loose, and the question of just how many paper (and apparently physical) assets have been double, triple, and n-counted (where n can be a number up to "infinity") by the infinitely daisy-chained modern global financial system in which one's liability is someone else's asset....apparently up to infinity times, the next logical step was for the firms named in the original Reuters article to step up and begin denials they had anything to do with anything. Sure enough, below is the first (of many) such response, by Interactive Brokers, claiming it has been greatly misunderstood and unlike MF Global, it has done nothing wrong at all. Of note is that IB was simply one of many brokers mentioned in the Reuters piece, where we read that "Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion)."  Sure enough, we predicted a firm would have to promptly step up and "deny all charges." To wit: "Oh Jefferies, Jefferies, Jefferies. Barely did you manage to escape the gauntlet of accusation of untenable gross (if not net) sovereign exposure, that you will soon, potentially as early as tomorrow, have to defend your zany rehypothecation practices." As it turns out Jefferies, and all the other mentioned banks tried to avoid this festering can of worms by completely ignoring the topic... until Interactive Brokers' response now demands that every single named bank has to do the same and come out with an outright explanation of why it has billions in hyper-hypothecation, or else not journalists and bloggers, but the market itself will suddenly start asking questions. Something tells us it will not be nearly as easy enough for the others to deny all charges... Incidentally, if this indeed becomes "the next big thing", what the potential collapse of (re) hypothection means is that PBs will be unable to lend out shares anymore, in effect collapsing stock shorting as there is one giant short stock recall/forced buy in. Ironicaly the unwind of the biggest market fraud could result in the entire market pulling one last "Volkswagen"style hurrah, before all hell breaks loose.

From Interactive Brokers



Below the response we have put forth regarding the Thomson Reuters article:


Recently, much has been written about the safety of customer assets held by brokers and we believe that customers are justified in their concerns. And so, we are writing to help clarify your understanding of how brokers are permitted to operate and, in particular, how Interactive Brokers protects its customers assets while servicing their needs to trade on margin.


To start, and so as not to leave any confusion as to the position of IB vis-à-vis the Thomson Reuters news article, IB DOES NOT, in any way:


1. Circumvent U.S. securities or commodities rules at the expense of our customers;


2. Invest customers’ segregated funds in foreign sovereign debt or utilize in-house repurchase agreements;


3. Commingle or utilize customer segregated assets for proprietary operations;


4. Enter into agreements which are designed to take advantage of supposedly unrestricted U.K. re-hypothecatio n rules; or


5. Engage in transactions deemed as “hyper-hypo thecation”.


More specifically, regarding hypothecation and the level of such activity at IB: - The hypothecation and re-hypothecation of customer assets is a standard and essential practice, which U.S. brokers employ in the course of financing customer activity. The rights to do so are longstanding, have been explicitly provided by regulation and one should not be surprised to see boilerplate consent language in each broker’s customer agreement acknowledging this.


For example, a customer who incurs a margin debit by virtue of the fact that they have purchased securities with only partly their own money, thereby relying upon the broker to lend them the funds to pay the balance at settlement, subjects a portion (up to 140% of the amount borrowed, also referred to as the margin debit) of those securities to a lien on behalf of the broker. The lien is also known as hypothecation. The broker, in turn, may pledge or re-hypothecate the securities upon which they have a lien to replace the cash.


In the case of IB, this re-hypothecatio n typically takes place in the form of a stock loan. In simple terms, IB borrows money from a third party, using the customer’s margin stock as collateral, and it lends those funds to the customer to finance the customer’s purchase. -


Similarly, a customer who carries a futures position must place a margin deposit with IB. IB may pledge the customer’s cash deposit to a futures clearing house in support of the margin required on that position.


While IB is not in a position to comment on the practices of others and whether they comply or fail to comply with these regulations, or do so in a manner which introduces unwarranted risk to the firm and its customers, we can state that we comply with all regulations and utilize investment policies that tend to be more conservative than those permitted under the regulations.


The Thomson Reuters news article alleged that IB, among other brokers, engaged in a practice that the author categorizes as “hyper-hypo thecation” (apparently a term used to describe a process in which a broker alters the risk of one financial instrument into the exposure of multiple other instruments and perhaps multiple counterparties through a daisy-chain series of pledges) at an amount of $14.5 billion.


While we are not sure of the author’s source for this number, we would refer interested parties to footnote 10 (“Collateral ”) on page 17 of our June 30, 2011 financial statement, which is posted on the IB website (http://www.interactive .pdf) and reads as follows:


“At June 30, 2011, the fair value of securities received as collateral, where the Company is permitted to sell or repledge the securities was $16,817,859,287, consisting of $13,022,386,422 from customers, $2,886,934,605 from securities purchased under agreements to resell and $908,538,260 from securities borrowed. The fair value of these securities that had been sold or repledged was $4,526,153,369, consisting of $2,583,920,633 deposited in a separate bank account for the exclusive benefit of customers in accordance with SEC Rule 15c3-3, $761,740,278 securities loaned, $877,478,486 securities borrowed that had been pledged to cover customer short sales and $303,013,972 securities that had been pledged as collateral with clearing organizations.”


A closer examination of this $16.8 billion balance reveals the following:


1.$13.0 billion represents the amount IB is authorized to pledge (largely based upon 140% of customer debit balances), of which only $0.8 billion has been repledged, largely through stock lending.


2.$2.9 billion represents the investment of customer’s cash balances in reverse repurchase agreements where the underlying collateral is U.S. treasury securities. These transactions are conducted with third parties and guaranteed through a central counterparty clearing house (FICC). $2.6 billion of this collateral, technically a repledge (i.e., part of the $4.5 billion “sold or repledged”), is not re-hypothecated and it remains in the possession of IB and held at a custody bank in a segregated Reserve Safekeeping Account for the exclusive benefit of customers. The remaining $0.3 billion represents collateral pledged to clearing organizations.


3.$0.9 billion represents short sale transactions whereby the sales proceeds have been pledged as collateral to fully secure the borrowed securities. These transactions are classified as securities sold (i.e., part of the $4.5 billion “sold or repledged”).


Based upon this information, which reflects prudently risk-managed broker financing transactions, we believe a fair-minded author would have drawn a different conclusion regarding IB and hyper-hypotheca tion given a minimum level of investigation and contact.



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Cassandra Syndrome's picture

Rehypothecation Bitchez.....

DormRoom's picture

How I turned free markets into ponzi schemes: The Rehypothecation Approach.


On every primary brokers top ten reading list this year.

Cassandra Syndrome's picture

Happened a lot in Ireland. The same green field for property development may have been used to secure 4 or 5 mortgages from different banks who then in turn collateralised many separate projects and sold them on internationally. That's why the government set up an SPV called NAMA, to hide the fraud, and protect the elite. Taxpayers are having to foot the €100 Billion bill with the loss of our soverneignty. It appears we're a mere microcosm of the world of 21st century finance. 

Kayman's picture

Canadian banks engaging in rehypothecation ?  Why, that must be an error...

Dome Petroleum, Bre-X, Asset Backed Commercial Paper, and Sino Forest.  Why that must have been some other country...

CPL's picture

You left off Bell Northern Research, Nortel, BlackBerry,


Practically the foundation of the entire pension pool of all Canuck pensions with the regulation changes on Canadian content in Mutual funds and pension portfolios.

GeneMarchbanks's picture

It's OK. I heard many 'Nucks have pensions with Fink over @ BLK. So they got that going for them...

The Big Ching-aso's picture



With so many denial rivers flowing at once things are bound to get damned up.


Manthong's picture

All is well as long as you assume the position and accept double secret hyper hypothecation.


Mr Lennon Hendrix's picture

I can't pretend to know how fast this will unwind but i do know that THIS IS IT.  this is why europe just moved to give banks unlimited funding.  this is what will bring the house down.

Ahmeexnal's picture

1 over unlimited is equal to....

PMs will surge big time.

But if you really want the best bang for your buck, try chickens, seeds, earthworms.

Yeah, laugh as you may today, but tomorrow you cry.

Little Red Rooter's picture

Ya! Potatoes bitchez! 

Chickens are da bomb - eggs, meat, fertiliser, easy to keep. 


Ahmeexnal's picture

Time is seriously running out now.

Credit crunch in eurobanks:

Swiss banker calling global financial crash:

The dominoes are about to collapse at full speed now!

trav7777's picture

Let me just give the abridged version of what IB is disclosing above.


It's as SIMPLE AS THAT.  Brokers are in the business of trying to MONETIZE every single thing they can.  They lend your securities.  They lend the securities you have borrowed.  They lend your cash.  They lend anything in any account, anyWHERE, and there is boilerplate that permits them to do it.

IB borrows money, buys the stock for your margin trade and then lends that stock back to someone else for the cash.  At that point, YES, they probably play roulette with that cash just like all the rest of the cash the firm has access to.  When I worked on MS's NY money desk, they were doing $30B of repo transactions per day back in the early 90s.  This is orders of magnitude bigger now, trying to create money from thin air.

So who really owns anything at this point?  The answer is you own it if it's in your hands and hasn't fallen out of your canoe last camping trip.

If shit goes sideways, the BIG FISH have PURCHASED special "face down trap cards" (YuGiOh reference) from the Congress which WILL put their claims ahead of yours.  PERIOD.  Don't argue, don't dispute, don't question; accept.

Pegasus Muse's picture

The historical parallels between pre-war Germany and

pre-??? USA today is troubling. 

We are already well down the path to an ugly destination. 

Watch this video before you read the They Thought They Were Free

Sen. Rand Paul on Freedom Watch with Judge Napolitano - 11/29/11

Johnny B Good's picture

Everything thats beeing broadcast on a big TV Station like FOX is, even if called "Freedom Watch", by DEFINITION a smokescreen pulled up to misdirect the peoples attention.


BY DEFINITION. If it where the real deal, they wouldn't, or wouldn't be allowed to, broadcast it. PERIOD.

Bearish News's picture

Nah, Judge Nap is solid. He's a big Ron Paul fan, I've seen him win a few supporter polls for who people favor for VP candidate.

WmMcK's picture

"Ally of Justice Decisive Armor", YuGiOh bitchez.

tmosley's picture

And yet no-one should own silver.


Mr Lennon Hendrix's picture

silver smells bad and attracts gypsies

trav7777's picture

At NO POINT did I ever say people shouldn't own any silver you binary-minded idiot.

I said that they should NOT LISTEN to silver pumping moron shills like YOU as to how to allocate their wealth.  And I have correctly pointed out that real wealth in silver is too heavy to run with and may end up being a TOTAL loss.

If, for some reason, you don't have access to a TRUCK that you can drive out to wherever you're going, you face the possibility of TOTAL LOSS with silver.

1000oz bar is a mere $32k at today's prices.  That is 31.1 kilos.  Do you really think you can pack that?  That's at the upper limit of a professional soldier's pack and you ALSO plan to truck all your ammo and guns and the rest of it.  If you have $320k in silver, you are going to be forced to WALK OUT on 90% of your wealth even if you can pack 62lbs with you.

With gold?  $32k is a mere 18oz at $1700/oz.

Silver is a get rich quick scheme pumped on the internet by people who are MORONS.

Ahmeexnal's picture

Yeah, right. So instead of silver people should...carry a wallet full of fucking credit cards.

What about your fucking home, do you also pack that with you when you have to pick up and leave?




SilverRhino's picture

People should have a variety of wealth options.  

Trav is merely pointing out that you should have silver AND gold. (and guns, food, water, portable power, etc .... )


tmosley's picture

lol, this is the first time you posted that argument.  What's wrong, did some reality finally crawl into your brain like an earwig?

You are fucking clownshoes.  Ridiculous.

tmosley's picture

Also, thinking back, you specifically said not a month ago that there would be NO SHTF.  Yet here you are talking about how silver is a terrible investment because you can't grab it and run, as though you expect a SHTF situation.

Which is it, douchebag?  Can't have it both ways.

vamoose1's picture

pucker up and slurp  even if you dont have a truck, maybe that awesome brain of yours could ,  uh,  rent one,  then you can  go shopping with an 1800 dollar coin  you quarter wit

Matt's picture

While carrying 31 Kg is certainly a pain in the ass, its not near upper limit. Average Emergency Approach Load in Afghanistan is around 59 Kg

While 30 Kg is more in line with Average Fighting Load. At the start of a panic, I don't think everyone will start shooting each other right off the bat, it could be days before that happens. These weights are counting everything being carried total, water, food, armor, etc.

Pesonally, I'm out of shape and wouldnt be carrying that, but I'm in a thinly populated rural area and don't plan on going anywhere.

Howard_Beale's picture

Bravo Trav. Well said without pissing anyone off. You feeling ok? :)

trav7777's picture

why, because everyone agreed with me?

wait until I push them toward their mental 3rd rails.  Everyone here is aboard with the fact that the brokerage/trading/market system is a scam.

But there are many planks of MSM orthodoxy they would defend with violence.

Ahmeexnal's picture

Yeah, such as the MSM promoted "white supremacy" shit.



Eally Ucked's picture

So maybe at the end of that 3-rail you will disclose to us your plan for the END. We always hear we're idots because we do that or this, what's your plan The Great One, commit suecide or you have that special solution you don't want to share with us?  

tmosley's picture

Cut your balls off and have the priviledge of becoming his slave as Supreme Overlord of the Earth.

Or some such egomaniacal jerk-off fantasy.  This idiot can't even keep a family together.

PonziBeaver's picture

+1 Yeah! Dam it!

Unwind the ponzi and let the real economy come back!

Kayman's picture


I have relatives living in Canada. The media is even more controlled than the U.S.

I don't know how Nortel slipped past me.  "What do you want the Internet to be ?  Anything you want it to be... "  Well, I'll have a ham sandwich then...

I couldn't help but notice all the insiders and the banks were out of Nortel around $80-90, before running it over $100 and down to zero.

TheFourthStooge-ing's picture

Interactive Brokers reassured everyone with:

To start, and so as not to leave any confusion as to the position of IB vis-à-vis the Thomson Reuters news article, IB DOES NOT, in any way:

[denials 1 through five snipped for brevity]

Of course they don't. They do it through their subsidiary, IARUK (Interactive Ass Rapers, U.K.).


Squid-puppets a-go-go's picture

yer, "does not engage in hyper hypothecation"

... comes down to a definition of hyper, then, dunnit?

defencev's picture

Listen,motherfucker. It is all very simple. You do not like or do not understand standard practices involved in margin trading, do not do it. You all, motherfuckers, like one thing: do nothing and speculate. The truth is that security markets are essential for functioning of capitalist system. And, in principle, the only necessary function of brokerages is to provide customers with an ability to buy stocks for cash.

If you do that and brokerages are not involved in fraud, the risk for you as a customer is minimal. (setting aside, of course, the risk of market fluctuations).

But no, motherfuckers, you want to trade on hude margin, you want to speculate on future prices of everything, you want to bet on sovereign debt, you want to short your mother and expect everything to be honkey dori. In real world you participate in ponzi scheme- you get what you deserve.

 I have my brokerage account with IB and I know that I am absoluely safe no matter what you , stupid motherfuckers are spewing.

Al Gorerhythm's picture

You seem to be as sure of yourself and your relationship with IB as all those happy campers lined up, cap in hand, outside of the office of the trustee of MF Global.

Killtruck's picture

Unnecessary Motherfuckering. 15 yards. Repeat first down.

pods's picture

Bit "defencev" aren't we?

Who would have thought you would have the foresight to pick  a username so fitting?

Sounds like you are really confident in your statement?

Either that or you have realized someone else has first dibs on YOUR money.


defencev's picture

Well,motherfucker. You seem to do not understand elementary things. If you bought security for cash , you own it. Even if your brokers goes under, it is yours. See e.g. what happened with Lehmann customers. You are involved in leveraging and playing with derivatives and you are on your own. See what happened with MF customers. You, guys, is a bunch of ignorant, brainwashed idiots who do not understand anything and listen to other motherfuckers whose only goal is to fear monger you in total panic. What I really recommend to you does not require any kind of intellectual effort but just a little bit of house bookkeeping. Just keep track of the accuracy of "predictions" posted in the "articles" over here. And you just quickly realize who is who. If someone posted an "article" on a "website", it does not mean that it is not an absolute, fucking bullshit.

pods's picture

I do understand elemetary things.  Quite well in fact.

If you are secure in your conclusions then what is the problem?

If all of us are crazy assed tin hatters, then why bother trying to convince us of anything?  You are just that much further ahead.

We have a difference of opinion, that is all.  Nothing to get upset about.  In fact, you have such courage in your convictions that you will trust your money to them.

I am not panicked at all.  Quite the contrary.  

Maybe you could follow a bit of your own advice?  Your money is safe.  



Don Keot's picture

My sentiments exactly.  I have never understood their compulsion to attack preppers.  If you are happy with your decision, STFU and live with it.  It's your business and your money. 

Squid-puppets a-go-go's picture

Sure, you own it.

but just try and redeem it

AAAAAHAHAHAHAHA, man are you a dolt. millions of investors the world over are losing their shirts to deliberately complex bullshit shadow instruments and you think you are somehow exempt?

Go on. Redeem your investment, then come back to ZH and post an image of the cheque .

Gohn Galt's picture

There are two kinds of hedgefunds left, those who think they can turn a profit for their customers and are thus are targeted to fail and those who understand the message and loose their customers money to unaccounted nameless entities. 

The commodities exchange was sold as a way for farmers to hedge against price fluctuations and weather.  A lot of remaining farmers were counting on these contracts for their survival.  Now crops prices will be low at harvest and medium and small farmers will sell at a loss.

TheFourthStooge-ing's picture

pods hit the nail on the head with:

Either that or you have realized someone else has first dibs on YOUR money.

Bingo. The butthurt is strong in this one.


IamMarla's picture

I hear that creepy music to 'valley of the dolls' As I read your words .

Piranhanoia's picture

See if you can get your money tomorrow before you get upset.

Bansters-in-my- feces's picture

Hey Defencev....

Eat a horse cock,mother fucker....and your going to take it and your going to like it.

Now go lay down,and behave,FuckTard.