Interactive Brokers reports $103m in expenses due to compensations to customers for oil trading

Maria Nikolova

The broker reported $103 million in expenses incurred to compensate certain affected customers in connection with their losses resulting from the West Texas Intermediate Crude Oil contracts settling at a price below zero on April 20, 2020.

Electronic trading major Interactive Brokers Group, Inc. (NASDAQ:IBKR) has just published its financial results for the second quarter of 2020, with the brokerage reporting a rise in expenses mostly due to compensations for customers affected by the oil price swings in April.

General and administrative expenses increased $106 million from the year-ago quarter, primarily due to $103 million in expenses incurred to compensate certain affected customers in connection with their losses resulting from the West Texas Intermediate Crude Oil contracts settling at a price below zero on April 20, 2020.

On April 20, 2020 the energy markets exhibited extraordinary price activity in the New York Mercantile Exchange (NYMEX) West Texas Intermediate Crude Oil contract. The price of the May 2020 physically-settled contract dropped to an unprecedented negative price of $37.63. This price was the basis for determining the settlement price for cash-settled contracts traded on the CME Globex and also for a separate, expiring cash-settled futures contract listed on the Intercontinental Exchange Europe (“ICE Europe”).

Interactive Brokers explains that several of its customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses, including losses in excess of the equity in their accounts. The company fulfilled the required variation margin settlements with the respective clearinghouses on behalf of its customers. The broker subsequently compensated certain affected customers in connection with their losses resulting from the contracts settling at a price below zero. As a result, the company recognized an aggregate loss of approximately $104 million.

Net revenues for the second quarter of 2020 were $539 million and income before income taxes was $222 million this quarter, compared to net revenues of $413 million and income before income taxes of $225 million for the same period in 2019. Adjusted net revenues were $523 million and adjusted income before income taxes was $310 million this quarter, compared to adjusted net revenues of $488 million and adjusted income before income taxes of $300 million for the same period in 2019.

Commission revenue showed strong growth, increasing $98 million, or 55%, from the year-ago quarter on higher customer trading volumes within an active trading environment worldwide.

Net interest income decreased $63 million, or 24%, from the year-ago quarter as the average Federal Funds effective rate decreased to 0.06% from 2.40% in the year-ago quarter.

Other income increased $86 million from the year-ago quarter. This increase was mainly comprised of $88 million related to Interactive Brokers’ strategic investment in Up Fintech Holding Limited (“Tiger Brokers”), which swung to a $14 million mark-to-market gain this quarter from a $74 million mark-to-market loss in the same period in 2019; and $22 million related to Interactive Brokers’ currency diversification strategy, which gained $16 million this quarter compared to a loss of $6 million in the same period in 2019. This was partially offset by $18 million related to Interactive Brokers’ U.S. government securities portfolio, which swung to a $13 million mark-to-market loss this quarter from a $5 million mark-to-market gain in the same period in 2019.

The Interactive Brokers Group, Inc. Board of Directors declared a quarterly cash dividend of $0.10 per share. This dividend is payable on September 14, 2020 to shareholders of record as of September 1, 2020.

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