Interactive Brokers reports no change in loss due to margin loans “incident”

Maria Nikolova

For the nine months ended September 30, 2019, the brokerage has recognized a net aggregate loss of approximately $42 million due to the “incident”.

Online trading major Interactive Brokers Group, Inc. (NASDAQ:IBKR) has earlier today published its 10-Q report for the third quarter of 2019, with the SEC filing revealing no change in the company’s estimates of the loss of a margin loans “incident” that occurred earlier this year.

As FinanceFeeds has reported, over an extended period in 2018, a small number of the the brokerage customers had taken relatively large positions in a security listed on a major US exchange. Interactive Brokers extended margin loans against the security at a conservatively high collateral requirement.

In December 2018, within a very short timeframe, this security lost a substantial amount of its value. During the quarter ended March 31, 2019, subsequent price declines in the stock have caused these accounts to fall into deficits.

For the nine months ended September 30, 2019, the company has recognized a net aggregate loss of approximately $42 million, due to this incident. The maximum aggregate loss, which would occur if the security’s price fell to zero and none of the debts were collected, would be approximately $51 million. This marks no change from the preceding estimates.

Interactive Brokers is currently evaluating pursuing the collection of the debts, although debt collection efforts are inherently difficult and uncertain. The ultimate effect of this incident on the company’s results will depend upon market conditions and the outcome of Interactive Brokers’s debt collection efforts.

Interactive Brokers extends margin loans to customers on a demand basis – these are not committed facilities. Factors considered in the acceptance or rejection of margin loans are the amount of the loan, the degree of leverage being employed in the customer account and an overall evaluation of the customer’s portfolio to ensure proper diversification or, in the case of concentrated positions, appropriate liquidity of the underlying collateral. Additionally, transactions relating to concentrated or restricted positions are limited or prohibited by raising the level of required margin collateral (to 100% in the extreme case).

Under margin lending agreements, the brokerage may request additional margin collateral from customers and may sell securities that have not been paid for or purchase securities sold but not delivered from customers, if necessary. As of September 30, 2019 and December 31, 2018, approximately $26.0 billion and $27.0 billion, respectively, of customer margin loans were outstanding.

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