As a follow-up to my posts on the financial sector crisis and TradeKing account protection, I wanted to keep you all informed about a new development that’s probably troubling a few of you: the Reserve Fund’s announcement that their Primary Fund money market has officially “broken the buck”. What’s “breaking the buck”? Let’s begin at the beginning here: The Reserve Fund announced yesterday that they’ve placed an investor redemption freeze of up to 7 calendar days on one of its money market funds, the Primary Fund (RFIXX). The Primary Fund had a $785 million stake in Lehman corporate paper which is now valued at zero. That pulls the per-share value of the Primary Fund down to 97 cents. Usually a money market fund’s net asset value per share (NAV) holds steady at $1 – that’s why dropping to 97 cents is called “breaking the buck”. It’s a rare occurrence in the money-market industry and usually a sign of the fund’s distressed finances.
As you can imagine, this development is making investors nervous, whether they’re directly affected or not. Most investors consider their money-market accounts like cash. They expect full freedom to withdraw their funds whenever they want, and they don’t expect the NAV to drop below $1.
Here’s another way to think of this scenario: imagine trying to open your piggy bank and finding out that, not only are you barred from withdrawing the money for up to seven days, your $100 bundle of cash inside the bank has dwindled to $97. That’s probably not what you were expecting when you stashed the money there in the first place.
MarketWatch put out an excellent story explaining this development in greater detail.
Luckily, only a few TradeKing clients were affected by this – 7, to be exact. Seven clients got into the Primary Fund after requesting that we invest their sweep accounts in a higher-yielding money-market fund and then choosing The Reserve’s Primary Fund as an alternative to our default cash sweep. Those 7 folks received prospectuses from the Reserve outlining the risks. We’re now actively getting in touch with them to explain the situation and find out what, if any, moves they’d like to make under the circumstances.
Now might be a good time to explain our default sweep account options and protections. Here’s the deal in brief:
Clients who deposit less than $50,000 and don’t request sweep will have their deposit remain in cash. (Since most of our clients are active traders, their tendency is to keep relatively little cash uninvested. In fact, some clients have requested NOT to be set up for sweep because they find all the journaling back and forth bothersome.) However, if you DO want your cash in sweep, you don’t need to meet any minimums – you just need to tell us, and we’ll sign you up.
Clients with more than $50k in cash are automatically enrolled in the sweep program with our clearing firm, Legent. That account is FDIC-insured up to $1 million in cash per client. FDIC stands for Federal Deposit Insurance Corporation; you may be familiar with the term from the banking world. (I’ll get into more detail about account protections in a moment.)
As an alternative to this FDIC-insured default sweep, some clients choose to park their cash in a money market fund; usually they’re seeking a little higher yield. We offer a money market fund that invests only in U.S. Treasuries, and we’ve previously offered the Reserve’s Primary Fund.
That’s how sweep works at TradeKing in a nutshell. Now let’s review the account protections side of things:
As a SIPC Member firm, TradeKing client accounts are protected up to $500,000, of which $100,000 may be in cash. (If you’re one of our clients who’s opted out of sweep or hasn’t requested it, your cash is covered in that $100,000.) A money market is considered a security, not cash, so it's included in the $500K above.
As I mentioned above, cash in Legent’s sweep fund is insured by the FDIC for up to $1 million. That protection is above and beyond the SIPC coverage (described above) and the excess SIPC coverage (see below).
TradeKing also has excess SIPC insurance secured through Lloyd’s of London, providing clients an additional $24.5 million of protection above and beyond the SIPC coverage amounts (for a total account protection level of $25 million), of which $900,000 may be in cash (again, that excludes money market funds).
The coverage applies to brokerage firm failure and any theft or misappropriation of customer funds and securities associated with that failure.
Whew, that was a mouthful! But I thought this was a good chance to lay out how all this works in detail.
Keep those questions coming, folks. We understand that these are stressful, uncertain times, and we’re more than happy to help you sort things out.
[image: The Reserve logo from their website]
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