Your Economy (No Politics)

[roguedolphin]

Regarding Billions$$$ "Vaporized" in customer accounts at MF Global...
http://www.siliconinvestor.com/readmsg.aspx?msgid=27917768

To: patron_anejo_por_favor who wrote (58183) 1/31/2012 12:12:30 PM
From: John Koligman 2 Recommendations Read Replies (2) of 58217

Here is what one trader on another thread is doing with his accounts to try and be a bit more proactive about this... He has more posts on the topic if anyone is interested at Dale Baker's thread....

http://www.siliconinvestor.com/subject.aspx?subjectid=17225

Regards,
John

To: rllee who wrote ( 106441)1/27/2012 3:53:06 PMFrom: E_K_S of 106475 Hi rllee -

One thing you might want to consider if you are looking to protect your assets held on account at a brokerage firm is to utilize a non revocable "Trust" account agreement rather than an individual and/or joint account agreement. With a revocable trust agreement where you are the trustee for the trust, I was told by Schwab that the SIPC provides up to $250K per Trust "beneficiary". If you list five beneficiaries in your trust, any deficiency in the account would be covered by the SIPC up to 5x$250K or $1.25M. Then of course the extra Schwab insurance kicks in.

An individual account is covered up to $250K, a joint account (husband & wife) would be 2x$250K or $500K and any IRA is considered as a separate Trust agreement and would pay $250K per stated beneficiary.

The problem I see is that the SIPC has less than 1% of the Funds available in their reserve to make good on their stated payment terms. Perhaps the Gov would bail out the Fund but do not put your faith in getting made whole from the SIPC, I don't.

The biggest issue will be that upon some type of failure event, all customer accounts would be frozen. You would not be able to move or transfer any funds. Any direct payments you might have on your account would be sent back to the requester firm/company w/ insufficient funds notification. Eventually, the brokerage firm would release part or all of their customer funds/securities based on how they are registered and in the type of the account they are held (Cash vs Margin). It could be days, weeks and perhaps months before things get resolved and your account(s) get unfrozen.

I have no doubt that my account(s) would be made whole over time but it could take a year or more if things got really ugly. I have other institutions (specifically a local Credit Union) where I keep sufficient cash that I can use to pay my daily bills.

I would suggest looking at a revocable trust as the way you hold title to your brokerage account(s). I have a total of three separate brokerage accounts and one Credit Union all linked by pre authorized ACH transfer links. I use one Trust agreement (that includes 5 beneficiaries) as the title holder for all of my accounts. The Trust uses the same SSN as my individual No. so my taxes are simple w/o having to prepare a special Trust return (if an EEN is used).

Stay simple, but understand where the potential risks are. On balance it is safer (& much eaiser) to keep securities in "street name" at your brokerage firm. Do check your brokerage firm(s) annual reports to see what their capital base is when measured against their customer account(s) liabilities. You can also check the ratings from S&P, Moody's and Fitch for your broker(s) and/or banking institution and/or Credit Union.

I have done all of this and feel quite comfortable w/ what I have discovered especially after you compare the same figures from 2009 vs 2012.

Hope that helps.

EKS
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From: E_K_S1/24/2012 9:40:27 PM
Read Replies (1) of 106475 The Denials Begin: Interactive Brokers Is First To Claim It Has Not Engaged In Commingling Rehypothecation
http://www.zerohedge.com/news/denials-begin-interactive-brokers-first-claim-it-has-not-engaged-commi...

From the article:"... 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)." ..."

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I suspect more Brokers will be impacted once we see the first default (ie Greece) as hypothecated securities are called in to securitize bad debts and/or derrivitive products betting on this default. This should happen by March 2012 as this is the date being discussed where Greece will default on one or more of their outstanding debts.

Someone mentioned how Canada avoided the first wave of the CDO defaults but from this article it looks like many of these banks are Canadian, perhaps as much exposure as $200B. This is only what is/was reported and I expect it is a lot more especially if you add in other derrivitive and/or "off book" agreements.

Most investors are seeing this as a non event and have stated that it is already "priced" in the market. For me, it's just the edge of the iceberg and I hope to stay clear of any "house-of-cards" that might fall.

Therefore, as a precaution, I converted my equity account from a "Margin" account to a "Cash" account today. I set up a separate "Margin" account that I funded only with those stocks that I want hypothecated back to the Broker and/or their third parties covered in the general broker margin application. (NOTE: For Schwab, their default broker application makes your account a Margin account unless specified differently at the time you complete their application. This means that all of the securities you hold on account are hypothecated to Schwab and their 3rd party clearing firms). I suspect this is the standard for all the other broker firms but I can only comment on Schwab.

Now, with my separate Margin account, I can specify those securities I want to hypothecate to Schwab. I will use this account to write covered calls and trading options (ie. buying calls and/or selling Puts). All of my other securities will be held in the cash account which is not subject to any hypothecation or any of the risks that might be associated with this type of asset collateralization.
I never have or need to use margin which is sometimes referred to as "buying power". Every security I own is paid for in cash. For me, this was a simple solution to avoid this third party hypothecation risk. It may be an over reaction but it also was a simple change to my personal brokerage account structure that provides me piece of mind.

The worst case secerno I see w/ most U.S. Brokerage firms that IF such an event hit them, all or parts of an account (that has stocks hypothecated to their Broker) would be frozen. Clients would not have access to their funds and/or securities. Eventually as things work their way through courts, clients would eventually be made whole. This could take several weeks or months to play through. Just witness MF Global. Will SIPC come to the rescue? Not sure especially if you consented to have your securities hypothecated. That's for the courts to decide.

Do your own due diligence and act accordingly. We live in in interesting times. The European defaults may be worked out and everything is/will be fine and the can will be kicked down the road. I like to error on the side of caution and hope to never experience anything like Ameritrade clients (I am one w/ a very small account) (Note: The Parent Company is Canadian) where their Money Fund "broke-the-buck" and/or the MF Global clients (some farmers) who had their accounts frozen due to third party broker clearing house agreements that hypothecated their securities and future contracts held on account.

EKS ---------------------------------------------------------------------------------------------------------------------------------------------------------

To: rllee who wrote ( 106384)1/23/2012 2:30:24 PMFrom: E_K_S Read Replies (1) of 106475 Hi rllee -

Under the broadest terms any brokerage account that allows margin (or is set up as a margin account) can hypothicate your securities (even when margin cash is not used). I checked the option and margin agreements I signed w/ Schwab and in very fine print I provided them my authorization to hypothicate my shares under this agreement.

In actuality, Schwab does not hypothicate any shares unless (1) you have borrowed money and (2) you have a margin call and are not able to pay back the funds borrowed; your shares will be sold to settle the balance due in your account.

Under the broadest terms of the margin agreement, shares held on account "could" be frozen and/or obligated to some third party if the broker entered into some type of hyper-hypothication derrivitive contract(s) that blew up.

This of course is the worst case scenario but still a possibility. There is no way to check to see if the broker entered into some type of hybrid hyper-hypothication derrivative product that could potentially blow up.

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For peace of mind, I plan to set up an entirely separate sub account at my brokerage that specifically is classified as a margin account that I use from time to time to transact options (write covered Calls and/or write naked Puts). I can then journal over mu shares to the margin account for writing covered calls or cash to nuy stock that may have been Put to me.

You are basically setting up a "fire-wall" between your margin account and your cash account.

Better safe & secure than waking up one morning and seeing your account frozen, your brokerage company filing BK as a result of some Black Swan hyper-hypothication derrivitive blowing up.

Is that the way you see it?

EKS