CFTC Fines Interactive Brokers $225,000

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It's all go today. I've only just finished blogging about connecting a new trading platform to one of my own brokers, and now I find said broker is in the news for a very different reason. The U.S. Commodity Futures Trading Commission have just issued a press release announcing that they have:

Today issued an Order requiring Interactive Brokers LLC (IB) of Greenwich, Conn., to pay a $225,000 civil monetary penalty for failing to calculate the amount of customer funds on deposit, the amount of funds required to be on deposit in customer segregated accounts, failing to maintain sufficient U.S. dollars (USD) in customer segregated accounts in the United States to meet all USD-denominated obligations, and supervision failures. The CFTC’s Order also requires IB to cease and desist from violating CFTC Regulations, as charged.

According to their website Interactive Brokers have been:

Rated Best Online Broker for the Second Year in a Row by Barron's 2013

and:

For 36 years the IB Group has been building electronic access trading technology that delivers real advantages to traders, investors and institutions worldwide. Interactive Brokers Group and its affiliates' equity capital exceeds $4.8 billion. We are the largest US electronic broker based on daily average revenue trades executing 407,000 trades per day.

Despite that reputation and all that equity capital, IB have fallen foul of the CFTC who find (with IB's assistance!) that:

From at least January 2008 through at least April 4, 2011, IB failed to compute as of the close of business each day, on a currency-by-currency basis, the amount of customer funds required to be on deposit and the amount of customer funds actually on deposit in segregated accounts on behalf of commodity and options customers.

Additionally, between September 21, 2011 and May 8, 2012, IB improperly covered a portion of its USD commodity futures and options customer obligations with Japanese yen and Swiss francs to maximize its interest earnings and not at the request of any of its commodity customers. As a result, IB did not retain enough USD in segregation to meet its USD-denominated obligations to its commodity customers – with the USD segregation requirement shortfall ranging from approximately $90 million to $300 million during that time, according to the Order.  IB discovered and self-reported this violation to the CFTC on May 10, 2012; however, IB had excess segregated funds ranging from $48.4 million to $455.3 million at all relevant times.

The Order itself goes into a bit more detail than the CFTC's press release, and reveals that:

From at least January 2008 until at least April 4, 2011, IB failed to compute as of the close of business each day, on a currency-by-currency basis, the amount of customer funds required by the Act and Regulations to be on deposit and the amount of customer funds on deposit in segregated accounts on behalf of commodity and options customers. Rather, IB only prepared such segregation calculations on an overall, USD-equivalent basis, in violation of Regulation 1.32(a).

From September 21,2011 to May 8, 2012, IB covered a portion of its USD commodity futures and options customer obligations with Japanese yen and Swiss francs. It did not do so at the request of any of its commodity customers but rather to maximize its interest earnings, in violation of Regulation 1.49(b ). As a result, IB did not retain enough USD in segregation to meet its USD denominated obligations to its commodity customers, in violation of Regulation 1.49(e). The shortfall in USD requirement ranged from approximately $90 million to $300 million during that time. IB discovered and self-reported the violations of Regulation 1.49 to the Commission on May 10,2012. During the time period of the violations of Rule 1.49, IB had excess segregated funds on deposit in customer segregated accounts (including USD plus other currencies) of between $ 48.4 MM and $ 455.3 MM.

Prior to May 9, 2012, IB did not have procedures in place to ensure compliance with Regulations 1.49 and 1.32. In fact, IB was not aware of its obligations under Regulation 1.49 until May 2012. Moreover, IB further failed to adequately train and diligently supervise its officers, employees, and agents to ensure compliance with Regulations 1.32 and 1.49, in violation of Regulation 166.3. IB independently implemented corrective measures after discovering the violations; and IB cooperated with the Division in investigating the circumstances.

The Order also reveals that:

In anticipation of the institution of an administrative proceeding, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Without admitting or denying any of the findings or conclusions herein, Respondent consents to the entry of this Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as Amended, Making Findings and Imposing Remedial Sanctions ("Order") and acknowledge service of this Order.

In all the circumstances one can't help but wonder how many other brokers there are still out there that don't even know what regulations they are supposed to be complying with, how the CFTC will discover that fact if said brokers don't follow in IB's footsteps and notify the CFTC themselves, and what fine the CFTC would impose if said brokers didn't offer an appropriate sum of money in advance?

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