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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?

  • Are you in the USA? – Nosjack Nov 5 at 20:28
  • you may get a standard answer that sipc covers it. But SIPC does not .. – Raj Nov 5 at 20:28
  • I am not in the USA but all my investments are with US brokerage firms. I have read all about the SIPC and am unimpressed with the small figure they offer which does not protect against fraud! I want much more than their "protection". – Ammar Nov 5 at 20:44
  • @Raj Oh noes!!! – Michael Nov 5 at 21:41
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    @Ammar Playing "devil's advocate" slightly... if you don't trust brokers to remain solvent, why would you trust an insurance company not to go bankrupt? (See Bankruptcy of insurance and reinsurance companies in the United States) – TripeHound Nov 6 at 9:21
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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.

  • Thank you Frank, this is most helpful and reaffirms what I read and knew about the SIPC's role. And indeed "Lehman Bros and Bear Stearns were too big to fail" which is why I am worried! The degree of uncertainty that I feel these days I have never felt in the past 23 years of investing in the stock market! Something is weird, what is controlling the markets is no longer sound investment decisions nor is it proper fundamentals! – Ammar Nov 6 at 7:21
  • With so many brokerage firms out there each holding trillions of dollars of clients assets and with the likes of Barclays' $2B fraud/theft incident a few years back and the Lehman Bros bust, I am sure there are other such incidents waiting to blow in our faces! – Ammar Nov 6 at 7:25
  • Perhaps as you said there are no private policies to protect holdings at brokerages against theft or fraud or bankruptcy of brokerages, BUT there should be some! Where are the insurance companies from this? They can insure some lady's "behind" and another's "breasts" or a soccer player's "feet", but they have no policies to protect our life-long hard-earned money invested in proper state-approved and certified brokerages? – Ammar Nov 6 at 7:31
  • Getting an identity theft insurance will cover one aspect of my fears, fraud from outside the brokerage firms! Can you guide me to where to start looking for such identity theft insurance, keeping in mind I am to a US citizen or resident? – Ammar Nov 6 at 7:31
  • Again, many thanks. i appreciate your time and efforts. – Ammar Nov 6 at 7:31
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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.

  • Thank you Bob, a very helpful answer. I would like to understand more about the "take opposing positions on a quid pro quo basis". Mind you my trading and investment knowledge is limited to basic stocks and options (Call/Put) trading. If you do to mind listing a couple of URLs that may explain your strategy more, I would seriously think of implementing it. I do not know why but worry has hit me and I cannot shack it off! Thanks again. – Ammar Nov 6 at 7:09
  • A simple one is you're long stock at broker (A). You short against the box at broker (B). No matter what the stock does, you only lose B/A spread, commission,and pay borrow rate (see invest-faq.com/short-against-the-box for US residents). Or, you can do a synthetic short with options at (B) which is buy put and sell call short. Or you could buy a very deep ITM put LEAP with low time premium to offset. See if you can understand this: brainscape.com/flashcards/… and how it might fit into the idea of protection – Bob Baerker Nov 6 at 14:04
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    Bob, this seems to me as a protection of the investment against market fluctuations, not what I want really. – Ammar Nov 6 at 15:19
  • You don't want protection of the investment against market fluctuations? And yet, this is what you asked in your original question: "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." – Bob Baerker Nov 6 at 15:34
  • What I meant there was if a brokerage goes bankrupt, the SIPC will try to return my assets as well as those of all other thousands if not millions of investors, and this process WILL take TIME which is the main issue with options! If I cannot do anything with my options for a while then I may simply lose all value! Also how is the proposed strategy protecting me against theft/fraud at the brokerage or even identity theft? – Ammar Nov 6 at 15:45

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