I use IB to hold my ETFs. Who is the Custodian? Open to a Madoff?

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msk
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Joined: Mon Aug 15, 2016 10:40 am

I use IB to hold my ETFs. Who is the Custodian? Open to a Madoff?

Post by msk »

My precise tax residence is not in the UAE but this is the closest sub forum I can find that closely resembles my tax status. So here goes:
I own a large figure portfolio at IB in Ireland-based ETFs, so I am reasonably confident that I am not unnecessarily exposed to US taxes. Nevertheless I am still concerned that I could be exposed to a Madoff-style ripoff. My understanding is that the SEC demands that brokers use a Custodian (such as State Street) to keep custody of stocks, etc. that broker clients buy and sell. Such a Custodian is NOT allowed to offer brokerage services. Nevertheless I find it strange that IB offers Custodian services to other brokers, wealth managers and investment advisors. I tried in vain to find out who is the Custodian for my Vanguard and Black Rock/iShares ETFs that I bought via IB. Anyone has this aspect sorted out? Otherwise IB clients might all be exposed to the powers-that-be at IB pulling a Madoff. Basically, your account shows that you own a million $ worth of, say, VWRD, but in fact somebody (like Madoff) has simply pocketed your money. Your entire transaction has been entirely imaginary within the cyber fence of IB. Of course even Vanguard could pull a similar stunt. We all keep faith that somebody within the SEC keeps auditing Vanguard et al. But as Madoff has demonstrated, not quite true. So, what company is the Custodian for overseas clients of IB? Anyone delved into this?
me81
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Joined: Fri Jan 04, 2019 12:37 pm

Re: I use IB to hold my ETFs. Who is the Custodian? Open to a Madoff?

Post by me81 »

I guess Madoff was not a publicly traded company, so it was already probably much less scrutinised..

In addition, here is from a document available online, from IB: "IB LLC is rated “BBB+/Stable/A-2” by Standard & Poor’s. The firm’s global independent auditors are Deloitte & Touche."

On top of the very long list of "reassurances/guarantees" mentioned on the IB website (which could obviously be all fake, but for the reason posted above, it would bee quite a trick to pull off).

Ultimately, we all trust the US system to carry out enough controls, the are also plenty of investigative journalists hungry for scandals and whistleblowers and in the end there is a 500k $ protection for the SIPC (which had its own interest to ensure compliance). I also read that some clients have up to 30m $ protection, if you're worth that much, sure you might want to check..

Lastly, after all, your broker acts on your behalf.. If they wake up tomorrow, sell whatever they can, cash in and hide in a remote island forever, maybe they might get themselves a few millions, surely not the >9b $ they manage for clients anyway..

I want to believe that there's a much bigger risk I screw up my own portfolio perfectly legitimately than a major brokerage firm through a world class fraud worth a place in the history of financial scams.. 😊
alex_686
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Re: I use IB to hold my ETFs. Who is the Custodian? Open to a Madoff?

Post by alex_686 »

To my knowledge, the SEC does not require a independent custodian of assets for brokers. Thus is required of mutual fund funds. I can think of numerous “Prime Brokers” who act as custodian for hedge funds and the like. Back ~20 years ago when I worked in Custody at a mid-evel firm we held lots of clients assets directly.

That being said, non-margin accounts are segregated from the broket’s assets, and the margin items are collaterized. This type if stuff is routinely audited by the SEC and SPIC. Madoff was audited by thr SEC but not the SPIC - which tends to be more focused on this particular issue.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Grt2bOutdoors
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Re: I use IB to hold my ETFs. Who is the Custodian? Open to a Madoff?

Post by Grt2bOutdoors »

It’s SIPC, not SPIC. FINRA also audits the broker.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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