Interactive Brokers is one of the most well-established brokers in the global market. In activity since the 70s, the company demonstrated resilience and adaptability, surviving financial crises, expanding into many different markets, and providing clients with a wide range of investment products and services.
Despite their impressive track record and market presence, it is natural to question the safety and reliability of the company; therefore, you might be asking yourself: “Is Interactive Brokers safe?” or “How is my money protected by them?”.
In this article, we will address your concerns by examining the various aspects that affect the safety and security of Interactive Brokers, looking at different countries and jurisdictions. By the end of this article, you’ll have a thorough understanding of how Interactive Brokers safeguards your investments, enabling you to make an informed decision about your financial future.
Before going in-depth into the subject, we can highlight the following points:
- Interactive Brokers has a robust business model with sound financial results that have increased in recent years.
- The broker has in place conservative risk-management measures to avoid financial distress, such as the daily calculation of the client’s assets’ value, high margin ratios, and a capital buffer over the client’s funds.
- It is regulated by many top-tier regulators (SEC, FCA, ASIC, among others), which provides for integrity and adherence to strong compliance rules.
- In case the first layers of protection against possible insolvency do not work, investors will be protected by regulatory measures that include investors’ compensation schemes (more details below).
- Additionally, some investors are eligible for additional insurance, increasing the maximum amount covered from $250,000 to $2,500,000.
- Concerning the Silicon Valley Bank (SVB) bankruptcy, the chairman and founder of Interactive Brokers, Thomas Peterffy, discussed in a CNBC interview the safety of keeping your money in banks and whether SVB’s collapse raises questions about deposit security.
What is the Interactive Brokers Business Model?
Interactive Brokers is a global broker that offers financial services to professional, institutional, and retail investors by providing direct access (“online”) trade execution and clearing services for various electronically traded assets. Interactive Brokers’ business model is limited to client trading, meaning that the broker does not perform proprietary trades and only acts as a facilitator for its clients to trade securities.
Although the complete list of services provided by the brokers may vary according to the subsidiary that will accept you as a client, you will be able to trade stocks, options, futures, currencies, bonds, gold, crypto, and funds. For that purpose, the broker created desktop, web, and mobile-based platforms that should be used depending on your knowledge and experience, such as the app IBKR GlobalTrader, focused on beginners who do not want to be overwhelmed by the advanced and sophisticated tools found in the other apps.
If you want to learn more about Interactive Brokers’ business model and have an overview of the broker, please check our Interactive Brokers review!
How does Interactive Brokers make money?
Interactive Brokers makes money through a few different ways: paid subscriptions, commissions charged for providing services, net interest income deriving from several services (e.g., lending money to clients using a margin, lending stocks for short sales, lending the investor’s cash that is not invested), market maker/trading revenue and other sources of income.
In particular, as we can see from the broker’s financial statement for the fourth quarter of 2022, the majority of their revenue comes from commissions and net interest income.
Interactive Brokers Financials
Interactive Brokers is listed on the NASDAQ, and it must publish quarterly and annual reports regarding its business activity, which demonstrates a good track record and strong financial position. From our analysis, we conclude that Interactive Brokers financial condition is sound. The company has no long-term debt and shows solid financial strength:
Over the past years, Interactive Brokers’ net income has grown considerably, demonstrating the profitability of the business activity. In fact, in the fourth quarter of 2022, Interactive Brokers presented its most profitable quarter up to that date. The broker also reveals other key metrics that contribute to their reputation and demonstrate financial health: their high number of assets under management (AUM) puts them in the list of the largest online brokers by AUM.
From an external perspective, the broker also seems to have good control of its financial risks with investments in short-term government securities, margin ratios above the market practice, collateralized loans, and automated risk-management measures. But even with this positive information and statistics, the financial markets are unpredictable, and you may still be wondering if Interactive Brokers is safe. A “black swan” could happen at any moment. It is important to know if your funds will be secure in case the broker faces difficulties, and which authority will be responsible for overseeing your market.
All Interactive Brokers subsidiaries and their regulators
Interactive Brokers is a global company that operates in 218 countries all over the world.
The type of protection offered by the broker will vary according to your country of residence and the respective subsidiary that will onboard you. Therefore, to know how your investment will be protected, first, you will need to know which subsidiary will provide the service for you.
|Interactive Brokers LLC (IB LLC)||All the eligible countries not under the scope of the other entities below. Includes the Americas (except for Canada), Asia (except the countries listed below), Africa, European countries that are not in the EEA.||US Securities and Exchange Commission, the Commodity Futures Trading Commission and member of FINRA, NYSE and SIPC|
|Interactive Brokers Canada Inc (IBC)||Canada||Member of the Investment Industry Regulatory Organization of Canada and Member of the Canadian Investor Protection Fund|
|Interactive Brokers (U.K.) Limited (IBUK)||United Kingdom||Financial Conduct Authority (FCA register entry number 208159)|
|Interactive Brokers Ireland Limited (IBIE)||EEA countries (except for the countries listed below) and Switzerland||Central Bank of Ireland|
|Interactive Brokers Central Europe Zrt. (IBCE)||Hungary, Romania, Bulgaria, Croatia, Slovenia, Slovakia, Czech Republic||Central Bank of Hungary (License No. H-EN-III-623/2020)|
|Interactive Brokers Australia Pty. Ltd. (IBA)||Australia and New Zealand||Australian Securities and Investments Commission (AFSL: 453554)|
|Interactive Brokers Hong Kong Limited (IBHK)||Hong Kong, China and Taiwan||Hong Kong Securities and Futures Commission and a member of SEHK and the HKFE|
|Interactive Brokers (India) Pvt. Ltd. (IBI)||India||Member of the NSE, BSE and SEBI|
|Interactive Brokers Securities Japan, Inc. (IBSJ)||Japan||Kanto Local Finance Bureau and a member of Japan Securities Dealers Association and The Commodity Futures Association of Japan.|
|Interactive Brokers Singapore Pte. Ltd. (IBSG)||Singapore, Malaysia, Indonesia, Thailand, Philippines, Vietnam, South Korea||Monetary Authority of Singapore (License No. CMS100917)|
Importance of Top-tier Regulation
Top-tier regulation is crucial to determine how safe your investments will be with a certain broker. Interactive Brokers is regulated by several top-tier regulatory bodies such as the SEC in the U.S., FCA from the UK, and the Central Bank of Ireland. As you will see below, the level and quality of the protection of your investments with the broker will vary according to the subsidiary that takes you on as a client.
Having a top-tier regulation ensures that the broker operates in a controlled and transparent manner, which allows for oversight and accountability. Investors become more protected from fraud, misconduct, asymmetry of information, and even from a crisis. In summary, good regulation will maintain the integrity of the financial market. You should always look for a broker regulated by top-tier authorities to ensure the highest level of protection and safety, which is the case with Interactive Brokers.
What if Interactive Brokers Go Bust?
We mentioned the importance of regulation, explained why we think that Interactive Brokers may be considered safe, and showed you how to know your regulator. But we still need to explain what will happen if there is a crisis or if the broker goes bankrupt.
Due to the complex structure of Interactive Brokers and the different levels of protection offered by different jurisdictions we mentioned above, the answer will depend on the region where you live and the respective subsidiary that will accept you as a client. For your convenience, we summarised and simplified below the regulatory aspects based on each of the subsidiaries.
a. Segregated accounts for securities and investment of cash balances
Specific regulatory requirements for each Interactive Brokers’ subsidiary will vary according to the region. However, the broker segregates customer funds and maintains this level of protection across all subsidiaries. This means that if the broker goes bust or insolvent, its client’s funds will be separated from the own funds of the financial institution. In practice, you would only need to transfer your assets from Interactive Brokers to another broker.
It is important to note, however, that Interactive Brokers holds the securities of its clients in “street name” instead of direct ownership by the investor. This means that the assets segregated are registered under the name of the broker, not with the name of the investor. The broker is the legal owner of the asset, while the investor is the beneficial owner.
But does this mean that Interactive Brokers is not safe? Does that make the segregation of the assets pointless? At the risk of oversimplifying, we believe that the answer to both questions is no. It does not directly affect the segregation of the assets, and the method is accepted by regulators. But it does have a procedural impact: since the broker does not hold securities in the customer’s name, the segregation occurs by pooling the funds and investments from all customers. If the broker goes bankrupt, you will be able to claim your share of the pool in proportion to your net equity claim. To counterbalance this measure and further protect the clients, Interactive Brokers calculates the value of its clients’ assets daily and segregates the amount with the addition of a substantial buffer.
While Interactive Brokers segregate all clients’ assets, they treat their cash balances differently. The broker invests most of the cash in very short-term investments and safeguards a small percentage of it. In March/2023, Interactive Brokers LLC (the U.S. subsidiary) invested approximately 92% of the client’s funds in short-term U.S. Treasury securities and reverse purchase agreements where they receive collateral in the form of the same U.S. Treasury securities. Only 8% of client money is segregated in banks, with the addition of the broker’s own money to cover the needs of clients.
b. Investment Compensation Schemes
If Interactive Brokers goes bust, your assets will not be used to pay off the broker’s debts because they are segregated. But administrative fees will apply. Besides, there is the risk of malpractice or an operational error. All of this could lead to the circumstance where the segregated funds are not enough to cover all the value that was invested by clients.
If that happens, generally speaking, your investment made with Interactive Brokers will be protected by an Investment Compensation Scheme: a safety net that works similarly to an insurance policy by compensating investors for certain losses up to a certain amount.
Since this protection will vary according to the jurisdiction where the investor resides, we summarized below the important information regarding the investor compensation scheme applicable for each of the subsidiaries.
|Subsidiaries||Investor Protection Schemes/Other Protections|
|Interactive Brokers LLC (IB LLC)||Securities are protected by the Securities Investor Protection Corporation (“SIPC”) for a maximum of $500,000 (cash sub-limit of $250,000). Futures and options on futures are not covered by the protection. The broker holds a policy at Lloyd’s of London which extends the coverage by an additional $30 million investors (cash sub-limit of $900,000), up to an aggregate limit of $150 million.|
|Interactive Brokers Canada Inc (IBC)||The broker is a member of the Canadian Investor Protection Fund. Eligible customers who, in the case of a firm’s insolvency, do not receive their cash, securities, or other eligible properties will be provided up to $1 million for general accounts plus up to $1 million for retirement accounts plus up to $1 million for registered education savings plans.|
|Interactive Brokers (U.K.) Limited (IBUK)||Most customers from the UK have their accounts cleared by Interactive Brokers LLC, making them eligible for the SIPC, as above. If you are an individual or a small business, your investment may be covered by the Financial Services Compensation Scheme, since IBUK is a member of the FSCS. However, limited products are eligible for this scheme, and the limit is up to £85,000 per person per firm.|
|Interactive Brokers Ireland Limited (IBIE)||Certain securities positions and cash are held with the US subsidiary, and protected by the SIPC. Retail investors are protected by the Irish Investor Compensation Scheme, which does not cover institutions and professional clients. The coverage is limited to 90% of the amount lost and is subject to a maximum of €20,000 per investor.|
|Interactive Brokers Central Europe Zrt. (IBCE)||Certain securities positions and cash are held with the US subsidiary, and protected by the SIPC. Retail clients are protected by the Hungarian Investor Protection Fund, which is limited to a maximum of €100,000 per client, where the IPF will pay 100% of the value up to HUF 1 million and 90% of the claim over HUF 1 million. Institutional investors, public businesses, local governments, and certain private individuals are not eligible for compensation.|
|Interactive Brokers Australia Pty. Ltd. (IBA)||Certain securities positions and cash are held with the US subsidiary, and protected by the SIPC. Retail clients are eligible for compensation under the National Guarantee Fund. There is no limit to the amount of compensation, but all clients of the market participant that goes insolvent cannot be paid more than 15% of the value of the fund.|
|Interactive Brokers Hong Kong Limited (IBHK)||Certain securities positions and cash are held with the US subsidiary, and protected by the SIPC. Clients of the IBHK are protected by the Investor Compensation Fund for financial products traded on the HKEX, and Northbound securities traded through Shanghai and Shenzhen Stock Connect. In these cases, the maximum compensation is HK$500,000 per investor.|
|Interactive Brokers (India) Pvt. Ltd. (IBI)||Certain securities positions and cash are held with the US subsidiary, and protected by the SIPC. IBI is registered with the Securities and Exchange Board of India (SEBI) and is protected by its Investor Protection Fund, which covers up to INR 25 lakhs per investor for certain investments.|
|Interactive Brokers Securities Japan, Inc. (IBSJ)||IBSJ is a member of the Japan Investor Protection Fund, which provides compensation of up to ¥10 million per client for eligible clients.|
|Interactive Brokers Singapore Pte. Ltd. (IBSG)||Certain securities positions and cash are held with the US subsidiary and protected by the SIPC.|
The rules for the compensation schemes can be complex, so please research if your investment is eligible for the scheme. If you are not sure, do not hesitate to contact the broker or leave a comment below, we can try to help you!
And remember: investing is risky. Compensation schemes can only be used if the broker goes bankrupt, but never to compensate for your losses due to a market fluctuation.
c. Additional protection
Another form of protection that deserves our attention is the so-called negative balance protection. In the European Union, retail clients (from the Irish and Hungarian subsidiaries) are protected from a negative balance regarding Forex and CFD trading. As a result, retail investors will not lose more money than deposited when trading the instruments. We mention this protection and a few others in our article about Investor Protection in the EU; please check it out if you are interested!
Besides the mandatory regulatory protections, Interactive Brokers also offers an insurance program as an additional layer of protection. Eligible IBKR pro accounts may participate in the program by logging into the account and accessing “Insured Bank Deposit Sweep Program” under the account settings option. By adhering to the program, investors can obtain up to $2,500,000 of FDIC insurance in addition to the $250,000 regular coverage.
Your protection as an investor may vary according to where you live, but Interactive Brokers manages to maintain consistently strong protection across all subsidiaries, adhering to strong measures and principles that mitigate financial risks.
But our goal is to contribute to your financial literacy. So we must say that even though the broker is reliable and financially sound, no one knows about the future. You must understand that investing always comes with risks; learn about those risks and educate yourself.
We hope that our article has helped you answer the question, “Is Interactive Brokers safe?”. Remember, be aware of risks, do your research, and make safe and informed decisions! If you still have any doubts or want to discuss any topic, please leave a comment below!
What is proprietary trading?
Proprietary trading is a practice where a firm uses its own capital to trade financial instruments with the aim of generating profits for itself. It involves taking on significant market risk in order to potentially earn high returns.
Do Interactive Brokers perform proprietary trading?
No, Interactive Brokers does not make proprietary trades.
What does it mean to hold assets in street name?
Holding assets in the street name means that a broker holds securities in its own name instead of the client’s name. The broker acts as the legal owner of the security, while the investor acts as the beneficial owner.
Does Interactive Brokers segregate its clients’ funds?
Yes, Interactive Brokers segregates its clients’ funds, despite holding them in street name. Clients’ funds are pooled and deposited in a segregated custodian account.