Since a broker uses the cash proceeds from a stock short sale as collateral, does that mean that this cash becomes an unsecured claim in case of a broker's insolvency or is this cash collateral held in a segregated account and outside of any insolvency proceedings (considering amounts over $250.000 which exceed SIPC protection)?
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In a sense, yes, it's unsecured. (Sure, they have regulations on the size of the negative, and insurance and such - but what backs insurance? Good guess! Utterly nothing.) It's worth noting that, forget merely "the market game", recall that >>>>>money<<<<< is totally unsecured. If a bank run happened today at 2pm in the USA, there is >>>>>utterly nothing<<<<< holding it up. Nothing. Zero. Nada. Not A Thing. We'd have hyperinflation and societal collapse in a week.– FattieCommented Jul 29, 2020 at 16:46
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Many brokers carry additional private insurance for their customers. This is known as Excess SIPC Insurance and it far exceeds SIPC limits. The amount varies from firm to firm.
For example, Pershing carries an aggregate loss limit of $1 billion for eligible securities over all client accounts and for cash, a per-client loss limit of $1.9 million for cash awaiting reinvestment—within the aggregate loss limit of $1 billion.
Vanguard has an aggregate limit of $250 million with a customer limit of $49.5 million for securities and $1.75 million for cash.
Fidelity has a Sweep Program that sweeps uninvested cash across FDIC banks. When uninvested cash balance exceeds $245k, the excess is swept into another bank. So for example, $700k of cash would be deposited into 3 banks making the entire $700k FDIC covered.
If you Google "Excess SIPC Insurance" you can read about the specific limits at each broker and for those that do not provide such information online, you can contact your broker for details.
answered Jul 29, 2020 at 11:21
