WSJ.com – Interactive Brokers Tightens Rules on buying Chinese burrito stocks on margin

By MICHAEL RAPOPORT

Interactive Brokers Group Inc. is barring its clients from using borrowed money to buy the shares of more than 130 Chinese companies in the wake of recent worries about accounting irregularities at China-based firms.

The Greenwich, Conn., electronic brokerage says on its website that it is making the move because of “elevated risk concerns.”

In recent months, dozens of Chinese companies have acknowledged problems with their accounting. The Securities and Exchange Commission has said it is investigating accounting and disclosure issues at Chinese companies that list on U.S. exchanges through “reverse mergers,” arrangements that can avoid the regulatory scrutiny that comes with an initial public offering. Stocks of some of these firms have tumbled this year.

The brokerage firm’s move, phasing in this week, bars investors from buying stocks on the list on “margin,” or with money borrowed from the brokerage. If a stock bought on margin declines sharply—as some China stocks have lately—a brokerage could have trouble getting its loans repaid and might seize an investor’s holdings as collateral.

The Interactive Brokers list numbers 159 securities from 132 companies. About 90 stocks are U.S.-traded; the rest trade on exchanges in Germany, Canada or other countries.

This isn’t the first time Interactive Brokers has made such a move. In April, the firm put dozens of other reverse-merger Chinese stocks on its no-margin list.

A spokesman for Interactive Brokers declined to comment.

Interactive Brokers tends to attract active traders. Last week, the firm reported daily average revenue trades, or DARTs, of 420,000 for May, a figure roughly on par with those posted for April by TD Ameritrade and Charles Schwab, even though Interactive has a customer base of only 173,000, compared with accounts in the millions at its rivals.

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