Insurance for my brokerage held investments

Question

This is not about protecting the VALUE of my investments against market fluctuations, stock prices drop ...etc.

What I am looking for is to protect my investments in shares and options that I am holding through a brokerage firm against fraud, mismanagement, bankruptcy of the brokerage or the clearing houses or any entity holding the shares and options, and against market value losses due to my holdings becoming temporarily unavailable to me.

If I have options that expire on a certain date and the brokerage goes bankrupt or is suspended for whatever reason, I will have no immediate access to my options and shares and I will lose the time value, if not all the value, of the options if returning my holdings to me takes time, and it sure will take months or maybe years!

I am looking for an insurance policy against bankruptcy or fraud in the brokerage I am using and to include the loss of market value as of the date the incident takes place. I would also like an identity theft insurance against someone hacking my accounts.

Of course such policy will have a cap that determines the premiums I will have to pay.

Any idea where I can find such a policy?

Answer 1

FINRA requires firms to maintain minimum net capital requirements to help prevent a firm from becoming insolvent, or at least requiring the firm to cease operations immediately. This is done to limit how over-extended a firm can get.

If your brokerage firm becomes insolvent then you will definitely lose the value of your options, if their expiration is within 3 months. SIPC, etc, do not protect against losses due to security pricing declines/worthlessness.

The larger brokerage firms typically provide excess SIPC coverage, up to $5m or more. That depends on the firm. If you're trading options and are concerned aobut the financial stability of your brokerage firm then you should cease doing business with that firm, or reconsider your options exposure. Granted, everyone thought Lehman Bros and Bear Stearns were too big to fail.

Here is the link to FINRA's site that provides some information:

https://www.finra.org/investors/alerts/if-brokerage-firm-closes-its-doors

Here is a link to SIPC's site that talks about excess insurance:

https://www.sipc.org/for-investors/investor-faqs#my-brokerage-firm-has-excess-sipc-insurance.how-does-that-work

Firms will state they do X, Y & Z to protect your accounts against hackers but nothing is foolproof. If something does occur, you are right to expect it to take longer than 3 months to resolve.

You can buy personal insurance policies to protect you against identity theft; look for the option that provides up front payments while the legal aspects are being finalized.

Answer 2

SIPC coverage comes into play when a broker shuts down and customer assets are missing due to theft, unauthorized trading, and other fraudulent activities. It guarantees the custody function of the broker and of your assets but not their value. SIPC will transfer your assets to another broker. This is likely to take a few weeks or months but certainly not years.

I doubt that there's a retail policy available for such events and even if so, it's not likely to be cheap.

I think that an alternative might be to have a second brokerage account that is partially funded. If it hits the fan, you can hedge your positions by taking offsetting positions with a combination of stocks and/or options, depending on what you are hedging. It can be done globally with index options or if you want more precision, you can take opposing positions on a quid pro quo basis. It will cost you some premium as well as the B/A spread and commissions (if your broker hasn't eliminated commissions).

It's messy but I think that it would be likely to cost you a lot less because you'd only get hit for the fees IF your broker goes under whereas with a policy, you'd get hit every year with the premium.