Interactive Brokers : IB LLC and IBG LLC S&P Rating Update - November 2020

Research Update:

IBG LLC Outlook Revised To Positive,

Ratings Affirmed On Reduced Market

Making And Growing Retail Client

Base

Primary Credit Analyst:

Robert B Hoban, New York + 1 [phone]; [e-mail]

Secondary Contact:

Thierry Grunspan, New York + 1 [phone]; [e-mail]

Table Of Contents

Overview

Rating Action

Rationale

Outlook

Ratings Score Snapshot

Related Criteria

Ratings List

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2020 1

Research Update:

IBG LLC Outlook Revised To Positive, Ratings

Affirmed On Reduced Market Making And

Growing Retail Client Base

Overview

• IBG LLC has substantially reduced its market-making business and

continues to expand its more-stable direct and indirect retail client

base.

• IBG's business and profitability have held up much better than we

expected in the face of COVID-19-related market and economic stress, low

interest rates, and its competitors' move to zero commission pricing.

• As a result, we are revising the outlook to positive from stable and

affirming our 'BBB' issuer credit rating on IBG and our 'BBB+' long-term

and 'A-2' short-term issuer credit ratings on its core U.S. brokerage

subsidiary, Interactive Brokers LLC.

• The positive outlook reflects our view that growth of less

confidence-sensitive retail brokerage clients and the shrinking

market-making business could reduce the firm's risk and bolster its

business and financial stability.

Rating Action

On Nov. 24, 2020, S&P Global Ratings revised the outlook on IBG LLC and its

subsidiary Interactive Brokers LLC to positive from stable. At the same time,

we affirmed our 'BBB' issuer credit rating on IBG and 'BBB+' long-term and

'A-2' short-term issuer credit ratings on Interactive Brokers LLC.

Rationale

The positive outlook reflects our view that growth of less

confidence-sensitive retail brokerage clients and the shrinking market-making

business could reduce the IBG's risk and bolster its business and financial

stability. IBG continues to grow its direct and indirect retail clients (that

are served through financial advisers and introducing brokers), which we view

as more sticky. This has reduced its institutional clients, which we view as

more confidence sensitive, to 17% of total client equity.

IBG has shut down its market making in all but India and Hong Kong, which has

reduced operational risk and shrunk the securities it holds on balance sheet

by 76% since the beginning of 2020. That said, the pandemic-related increase

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2020 2

in market volatility caused the value at risk-measured market risk of this

business to rise slightly in 2020.

The rating affirmation on IBG and subsidiary Interactive Brokers reflects the

consolidated firm's solid market position, very strong capitalization,

resilient earnings in the face of lower rates and competitive pressure, and

adequate funding and liquidity. While risk has decreased with the shrinkage of

market making, we believe IBG still faces model and operational risks from

this business. Its reliance on more-volatile transactional revenues and

still-material portion of more confidence-sensitive institutional clients, as

well as the highly competitive nature of the businesses continues to at least

partially offset these strengths. We think that, even though IBG has settled

its anti-money laundering and Bank Secrecy Act-compliance issues with its

regulators, compliance risk is elevated because it remains the subject of a

U.S. Dept. of Justice (DOJ) inquiry.

IBG is a holding company that, through its regulated broker-dealer

subsidiaries, is a major global electronic broker serving both retail and

institutional clients. We believe IBG's market position and profitability

benefit from its technology-enabled, low-cost provider status, which supports

unique, low-cost, and high-functionality offerings. While the firm's brokerage

has been the leader in daily average revenue trades, it is substantially

smaller than its main retail peers in terms of total client assets, with $233

billion as of Sept. 2020. IBG remains reliant on market-sensitive revenues,

and the decline in short-term interest rates and increase in trading activity

lowered the contribution of net interest income to about 40% in 2020 versus

56% in 2019.

IBG continues to post very strong pretax profit margins above 65% despite its

competitor discount brokers' move to zero commissions on trades of U.S.

equities and exchange-traded funds and the base-rate on listed options, as

well as the reduction in short-term interest rates to close to zero. Unlike

its competitors, IBG offers customers both its traditional low commission

pricing option and a zero commission option that includes revenue-increasing

measures (such as higher rates on margin loans) that offset the reduction in

commissions.

IBG's risk-adjusted capital (RAC) ratio of 45% as of Sept. 30, 2020, is the

highest among the U.S. securities firms we rate and a key rating strength. It

provides, in our view, an ample cushion to absorb potential losses arising in

the large margin loan book (over $30 billion) or associated with customers'

active derivatives trading activity (such as the over $100 million loss in

April this year to indemnify clients in West Texas Intermediate (WTI) energy

futures).

Although customers' derivatives trading activity can give rise to substantial

margin calls at clearinghouses (such as Options Clearing Corp. in March this

year), the firm can, under certain conditions, pledge derivatives customers'

securities to meet margin calls, greatly mitigating liquidity risk in a stress

scenario, in our view.

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Research Update: IBG LLC Outlook Revised To Positive, Ratings Affirmed On Reduced Market Making And

Growing Retail Client Base

Our rating on Interactive Brokers, IBG's U.S. broker-dealer subsidiary, is at

the same level as the 'bbb+' group credit profile because it is an operating

company. Our issuer credit rating on IBG is one notch lower than the group

credit profile, reflecting the entity's structural subordination as a

nonoperating holding company for regulated subsidiaries.

Outlook

The positive outlook on IBG reflects the shrinkage in its market-making

business and the related market and operational risk, as well as the continued

growth of its less-confidence-sensitive retail clients, which we believe, if

continued, could improve its business and financial stability. This also

reflects the fact that IBG's business and profitability have been less

affected by COVID-19-related market and economic stress, and more of its

competitors moving to zero commission pricing than we expected. We forecast

that the firm will maintain its risk-adjusted capital (RAC) ratio well above

25%, gross stable funding ratio (GSFR) above 110% and solid liquidity,

including a coverage metric typically above 90%.

Over the next 12-24 months, we could raise the ratings if:

• Profitability remains very strong;

• IBG's portion of more-stable and less-confidence-sensitive retail and

financial adviser clients grows to provide improved diversification and

stability;

• The DOJ inquiry is resolved and the company establishes a strong

regulatory compliance track record;

• It remains committed to holding very strong levels of capital and

successfully manages its margin loan exposures with minimal losses; and

• Options market-making risk runs down materially.

Downside scenario

Over the same time horizon, we could revise the outlook to stable if we expect

the firm's RAC ratio to weaken to below 20%, or if its business displays less

stability or higher risk or losses, or liquidity deteriorates.

Ratings Score Snapshot

Issuer credit rating (ICR) BBB/Positive/--

Interactive brokers LLC ICR BBB+/Positive/A-2

GCP bbb+

Anchor bbb-

Business position Adequate (0)

Capital and earnings Very strong (+2)

Risk position Adequate (0)

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Research Update: IBG LLC Outlook Revised To Positive, Ratings Affirmed On Reduced Market Making And

Growing Retail Client Base

Funding and liquidity Adequate/Adequate-high (0)

Comparable ratings adjustment 0

External influence; -1

Government influence 0

Group influence -1

Rating above the sovereign 0

Related Criteria

• General Criteria: Group Rating Methodology, July 1, 2019

• Criteria | Financial Institutions | General: Risk-Adjusted Capital

Framework Methodology, July 20, 2017

• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings

, April 7, 2017

• Criteria | Financial Institutions | General: Nonbank Financial

Institutions Rating Methodology, Dec. 9, 2014

• Criteria | Financial Institutions | Banks: Banking Industry Country Risk

Assessment Methodology And Assumptions, Nov. 9, 2011

• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action

To From

IBG LLC

Issuer Credit Rating BBB/Positive/-- BBB/Stable/--

Interactive Brokers LLC

Issuer Credit Rating BBB+/Positive/A-2 BBB+/Stable/A-2

Certain terms used in this report, particularly certain adjectives used to

express our view on rating relevant factors, have specific meanings ascribed

to them in our criteria, and should therefore be read in conjunction with such

criteria. Please see Ratings Criteria at www.standardandpoors.com for further

information. Complete ratings information is available to subscribers of

RatingsDirect at www.capitaliq.com. All ratings affected by this rating action

can be found on S&P Global Ratings' public website at

www.standardandpoors.com. Use the Ratings search box located in the left

column.

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Research Update: IBG LLC Outlook Revised To Positive, Ratings Affirmed On Reduced Market Making And

Growing Retail Client Base

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2020 6

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