Interactive Brokers Custody Account

Overview

March 3, 2011
Domka, Lukasczik and Sussman
Why would an IB Custody Account be used
instead of the other IB account types?

This account type would be used by a Mutual

fund or Pension/Profit sharing program that is
not allowed to deposit margin collateral
directly with a broker dealer due to industry
regulations.
 Who is the Custodial account for?

A Regulated Investment Company under the

1940 Act; a pension or profit sharing plan
governed by ERISA; a trust whose terms
specify that the assets must be held at a bank;
or a customer who is prohibited by federal,
state or foreign law, or some other regulation,
from depositing margin collateral directly with
a broker-dealer.
 How is a new account set up?

The Collateral Account holds the assets, which are deposited at an IB account at a
Custody Bank for the benefit of the customer (i.e. the fund). We’ll call this bank
account the Custodial Bank Account for the rest of this discussion.

The standard IB cleared account opening process is completed along with the
current version of the “IB Custodial Account Agreement”. A copy is available on the
sales web site or by contacting salessupport@interactivebrokers.com .
Please, note that mutual funds applications are completed and signed off by the
funds administrators so it is best to deliver a complete set of documents for the
administrator to complete. Once the fund signs off on the custodial agreement the
custodial bank will need to sign off and return it to IB for a final signature and then
complete originals will be returned to the signing parties.

Then IB will open the Custodial Bank Account for the benefit of the customer. The
customer, IB and the Custodial Bank will enter into a tri-party agreement, which
allows IB to gain access to the account at the Custodial Bank.

Continued
 How is a new account set up? II

Remember, that IB needs to have a separate Custodial Account for every

beneficiary (typically a fund). If IB is already dealing with the Custodial Bank, the
account opening process will only take a few days. However, if IB had not been
dealing with the Custodial Bank of your candidate, IB has to work out the technical
means of receiving daily account updates from the Custody Bank. This can take
weeks, depending on the technology or operational process utilized. You can help
this process along by providing IB’s back office with the technical / operational
contact at the Custody Bank.

Once the client’s account is opened and approved at IB, and IB has set up the
relationship with the Custody Bank, the client will deposit collateral into the
Custodial Bank Account acceptable to IB.(cash is not acceptable)

Once the collateral is deposited, IB will confirm and load the list of assets to the
customer’ Custody Account at IB. This will then allow the client to trade in the
trading account up to the same amount as if the collateral was deposited directly
with IB.
 Operational overview of Custody Account
structure at IB?
IB implements Custody Accounts by bundling one or more trading-
accounts with a Collateral Account in an Aggregate Margin Family. Both
the trading account and the Collateral Account are cleared IB accounts.
We recommend that the accounts be opened with the margin type of
Portfolio Margin.

When the customer logs in to the IB Trader Workstation or Account

Management, he will typically see three accounts, like this:

U123 – The master account

U234 – The Collateral Account, which represents assets deposited at
the Custodial Bank Account.
U235 – The trading account
(When we talk about an IB Custody Account, we mean the bundle of the
above accounts.)
 Customer Service/Operation

Day to day client servicing will be performed

by the PrimeServe team.
 How is the IB Collateral account updated?

IB will inspect the asset list in the Custodial

Bank account and update its records by
reflecting the same assets in the IB Collateral
account. For some of the banks this will be a
manual procedure by IB’s back office, but for
most of the banks this procedure will be
automated via a daily transmission from the
Custodial Bank.
How is the margin computed for the purposes
of authorizing orders?

Margin is computed for the net sum of assets

in the trading and custody accounts, then it is
compared to the net sum of assets in the
trading and collateral accounts. For the
purpose of credit vetting a new order, IB
handles the Aggregate Margin Family as one
account.
 How does liquidation work?

IB will not liquidate automatically. Once a

margin deficit exists, IB will not allow further
margin increasing orders. IB will send daily
margin calls as well as make an attempt to
contact the customer in order to remedy the
situation. If such attempts fail, IB will
commence liquidation of positions at IB’s
discretion. The schedule of liquidation will
depend on the amount of deficit and the
remaining equity in the IB Custody Account.
 How is interest charged?

There will be no interest charge (or credit) in the

IB Custody Account. The trading accounts will get
an interest charge or credit based on their daily
cash balance, like any other cleared account. In
addition, the trading account will get an interest
charge for the amount of margin it needs in order
to hold its overnight positions. The interest
schedule for the margin interest charge is
identical to IB’s debit interest schedule. Interest is
accrued daily and posted to the cash balance at
the end of the month.
 How is trade commission charged?

Trade commission is charged to the cash

balance at trade time, same as for any other
cleared account. The customer has the option
to deposit funds to cover the charge or carry
the debt balance with IB in the trading
account.
How do daily / monthly statements work?

Daily and monthly statements work identically

to cleared accounts. IB presents a daily
balance sheet with all balances and
transactions. Customers have the option to
view their statements on line, get an html
email or use the flex tool to customize the
downloads.
 Sales Notes

• Qualify the funds! The Custodial account type should only

be used, if the Fund is not permitted to hold collateral with
IB.
• The custodial administrators are the gate keepers to many
funds so keep them happy when building the relationship.
Also positive referrals from the fund traders are another
source.
• 40X funds are your best sales targets (these are funds that
use leverage) and there are new ones popping up each day.
• These are normally larger traders and be sure in your start
up training to introduce them to the IB Block desk.