Interactive Brokers CEO Thomas Peterffy Stands Ground on Negative Balances

Forex Magnates reached out to Thomas Peterffy, CEO of Interactive Brokers.

Forex Magnates reached out to Thomas Peterffy, CEO of Interactive Brokers, for his analysis and opinions of negative account balances and broker oversight regarding the SNB shock. His interview can be read in full below.

1. Mainstream media reports tend to portray forex trading as particularly risky. Do you agree with this notion?

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There is always risk to forex trading as margin requirements in the forex space have been between 1 and 10%. As such, any time the market moves more than that, the broker may become exposed.

2. Do you think that traders should carry responsibility for their trades outside of the funds on their accounts?

Absolutely, it is the same as with futures. A trader should be aware that there is a time when they can lose more money than what they deposited with their broker and they have to be good for it. It does not happen often, but it does happen from time to time.

3. Why do you think so many forex brokers took the path of forgiving negative balances?

Some brokers took accounts at 1% margin level and indicated on their website that the accounts would not be responsible for any losses beyond this. Some brokers followed this practice before the Swiss event. Thus, many brokers had a contract and did not have a choice – even though it is against CFTC regulations to guarantee any account against losses in excess of any amount.

4. Why did IB choose not to forgive those? What is the company’s policy on this subject?

We have never been in the practice of forgiving negative balances; It is not what our contract states. Most of our customers’ losses on the Swiss franc came from regulated futures contracts. The CME is a regulated exchange and the contract is straightforward. The problem is that the commodity exchanges wear two hats. As for-profit institutions they want more trading volume, and in order to get that they stipulate margin requirements that are often lower than they should be. On the other hand, as self-regulated entities, they are responsible for the safety of the system. In the end greed wins over safety.

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In our case, as brokers, we must pay more than 50% of our commission on the average futures trade to the exchange as a per contract fee and still end up with 100% of uncollectable customer losses. Futures brokerage is not a riskless business.

5. In what ways is the Swiss National Bank (SNB) event unique, compared to an event causing a certain stock or commodity’s worth to jump or tank 30-40%?

I do not recall a currency peg that was broken in such a manner as the recent Swiss Bank event. This event was reminiscent of the stock market crash of 1987 where markets lost nearly 25% and several price moves in markets in 2008-9 that approached 10%. But those large price moves did not occur in an instant, rather they occurred in the span of minutes or hours, providing brokers and customers sufficient time to liquidate. There are many occurrences in other markets, but moves in individual stocks are the most likely comparisons that come to mind.

6. How do you think risk management strategies and procedures should be affected going forward after the SNB shock?

The SNB’s actions should caution brokers that other central banks might not be as careful in their actions as they traditionally have been.

7. Why do you think companies which had seen close to 90% of their clients go short on the Swiss franc have not been using out of the money options to protect their exposure?

Many people did quite the opposite, they sold out of the money calls on the Swiss franc. It is important to note that just three days before the abandonment of the currency peg, the chairman of the SNB reaffirmed the peg. As a result, most did not provide for the possibility that the peg could be abandoned.

8. Do you expect any regulatory repercussions from the Swiss franc debacle on major foreign exchange brokers?

The CFTC and the SEC were proposing that minimum margins be as high as 10-20% for brokers. If this should ever take place, it would put brokers at a severe competitive disadvantage compared to banks. Forex activities by banks are not regulated by the CFTC or the Securities and Exchange Commission (SEC) and they would be able to undercut margins charged by brokers. If this should ever come to pass, many brokers would be out of business.

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