How to convert a currency if you wish to trade products in a currency other than the currency your account was initially funded in
For additional information on currency conversions please refer to the Knowledge base articles:
The particular regulation which determines the minimum amount of margin collateral that each broker is required to collect from clients transacting in U.S. exchange listed products generally depends upon the following 3 factors:
1. Product Classification - the principal determinant of regulatory oversight is based upon whether the product is classified as a security or commodity. Security products, including stocks, bonds, options and mutual funds are regulated by the Securities and Exchange Commission (SEC). Commodity products, which include futures contracts and options on futures contracts, are regulated by the Commodities Futures Trading Commission (CFTC). Single stock futures, a special class of futures contracts, are considered a hybrid product subject to joint regulation by the SEC and CFTC.
In the case of security products, the US central bank referred to as the Federal Reserve (FRB) holds responsibility for regulating the extension of credit by brokers and dealers. This is accomplished through Regulation T, or Reg T as it is commonly referred, which provides for establishment of a margin account and which imposes the initial margin requirement and payment rules on certain securities transactions. For example, on stock purchases, Reg T currently requires an initial margin deposit by the client equal to of 50% of the purchase value, allowing the broker to extend credit or finance the remaining 50%. Reg T does not establish margin requirements for securities options which fall under the jurisdiction of exchange rules (subject to SEC approval). In addition, the FRB has excluded from Reg T the authority to establish either initial or maintenance margin requirements on securities positions held in a portfolio margining account. here margin authority resides with the security exchanges whose rules are subject to SEC approval.
The authority for establishing margin rates on commodity products resides with the listing exchanges, with the exception of broad based stock index futures, for which the FRB has delegated authority to the CFTC.
In the case of single stock futures, margin is set by the listing exchange and subject to SEC approval to the extent the position is carried in a securities account, and subject to an agreement that the margin be equivalent whether held in a securities or commodities account. Margin for single stock futures are currently set at 20% of the underlying stock value.
2. Initial or Maintenance - initial margin generally refers to the amount of money or its equivalent that the customer must deposit in order to initiate the position and maintenance margin the amount of equity which must be maintained in order to continue holding the position. As noted above, Reg T controls the initial margin requirement on securities transactions. The rules of the listing exchanges specify the maintenance margin requirements on security transactions subject to SEC approval. The maintenance margin requirement for long stock positions is currently set at 25% although brokers often establish 'house margin' requirements in excess of that, particularly where the security is considered low-priced or subject to volatile price changes.
Commodities exchanges establish both the initial and maintenance margin requirements for products which they list (subject to provisions for broad based index futures and single stock futures as noted above).
3. Listing Exchange - as noted above, in the case of US securities products the listing exchange has the authority to establish rules for the maintenance margin requirement on positions held in a Reg T margin account and initial and maintenance margin (currently the same) for positions held in a portfolio margin account. Exchange margin rules, however, require prior SEC approval which acts to ensure that margin requirements are set in a consistent manner across exchanges.
Subject to the provisions noted above, commodities exchanges maintain authority to establish both initial and maintenance margin requirements. As a general rule, US commodities exchanges employ the same risk-based margining methodology referred to as SPAN for determining the margin requirement on listed positions with each exchange specifying the relevant SPAN input factors (e.g., Price Scan Range, Volatility Scan Range, Spread Charges, Combined Commodity offsets).
Leveraged Exchange Traded Funds (ETFs) are a subset of general ETFs and are intended to generate performance in multiples of that of the underlying index or benchmark (e.g. 200%, 300% or greater). In addition certain of these ETFs seek to a generate performance which is not only a multiple of but also the inverse of the underlying index or benchmark (e.g., a short ETF). To accomplish this, these leveraged funds typically include among their holdings derivative instruments such as options, futures or swaps which are intended to provide the desired leverage and/or inverse performance.
Exchange margin rules seek to recognize the additional leverage and risk associated with these instruments by establishing a margin rate which is commensurate with that level of leverage (but not to exceed 100% of the ETF value). Thus, for example, whereas the base strategy-based maintenance margin requirement for a non-leveraged long ETF is set at 25% and a short non-leveraged ETF at 30%, examples of the maintenance margin change for leveraged ETFs are as follows:
1. Long an ETF having a 200% leverage factor: 50% (= 2 x 25%)
2. Short an ETF having a 300% leverage factor: 90% (= 3 x 30%)
A similar scaling in margin is also in effect for options. For example, the Reg. T maintenance margin requirement for a non-leveraged, short broad based ETF index option is 100% of the option premium plus 15% of the ETF market value, less any out-of-the-money amount (to a minimum of 10% of ETF market value in the case of calls and 10% of the option strike price in the case of puts). In the case where the option underlying is a leveraged ETF, however, the 15% rate is increased by the leverage factor of the ETF.
In the case of portfolio margin accounts, the effect is similar, with the scan ranges by which the leveraged ETF positions are stress tested increasing by the ETF leverage factor. See NASD Rule 2520 and NYSE Rule 431 for further details.
Account holders hedging or offsetting the risk of futures contracts with option contracts are encouraged to pay particular attention to a potential scenario whereby a change in the underlying price may subject the account to a forced liquidation even if the account remains in margin compliance. This scenario is driven by a fundamental difference in which gains and losses are recognized in futures contracts vs. options contracts coupled with IB's requirement that the commodity segment of one's account maintain a positive cash balance at all times.
Gains and losses in a futures contract, by design, are settled in cash and IB updates the account holder's cash balance through the TWS on a real-time basis for any changes in the futures contract price. An option contract is also marked-to-the-market on a real-time basis but this change in value represents an unrealized (i.e., non-cash) profit or loss with the actual cash proceeds not reflected in the account until such time the contract is either sold, exercised or expires.
To illustrate this scenario, assume, for example, at time 'X' a hypothetical portfolio consisting of a credit cash balance of $6,850, 2 short Sep ES futures contracts, 2 Long Sep ES $1,000 strike call options on the futures contract marked at $31.50 each, with the cash index at $1,006. Also assume that at time 'X+1' the cash index increases by 100 points or approximately 10%. A snapshot of the account equity and margin balances for each date is reflected in the table below.
|Portfolio||Time 'X'||Time 'X+1'||Change|
|2 Long Sep ES $1,000 Calls*||$3,150||$10,300||$7,150|
|2 Short Sep ES Futures*||-||-||-|
*Note: the contract multiplier for the ES future and option is 50.
As reflected in the table above, the projected effect of this market move would be to decrease the cash balance to a deficit level based upon the mark-to-market or variation on the futures contracts of $10,000 (100 * 50 * 2). While the effect of this upon equity would be largely offset by a $7,150 increase in the market value of the long calls, the unrealized gain on the options has no effect upon cash until such time they are either sold, exercised or expire. In this instance, IB would act to liquidate positions in an amount sufficient to eliminate the cash deficit while maintaining margin compliance and attempting to preserve the greatest level of account equity.
While hypothetical in nature, this sample portfolio is intended to be illustrative of the liquidity risk associated with any portfolio containing futures and long options where the funding of any variation on the futures position must be supported by available cash or buying power from the securities segment of the account and not unrealized option gains.
A special arrangement between CME Group and the Singapore Exchange (SGX), referred to as the Mutual Offset System (MOS), allows traders of both the Yen and USD denominated Nikkei 225 futures to take positions in the products at one exchange and offset them at the other one. The effect of this arrangement is to create one marketplace crossing different time zones as well as fungibility of contracts between the exchanges.
IB account holders may avail themselves of the MOS functionality by specifying at the point of trade entry both the proper underlying symbol and exchange. In the case of the Yen Denominated Nikkei 225 Index contract the IB underlying symbol is 'NIY' and the exchange either 'Globex' (for contracts listed at and trading during CME hours) or 'SGXCME' (for contracts listed at and trading during SGX hours). In the case of the USD Denominated Nikkei 225 Index contract the IB underlying symbol is 'NKD' and the exchange either 'Globex' (for contracts listed at the CME) or 'SGXCME' (for contracts listed at the SGX).
To illustrate the concept of fungibility, were an account holder to enter into a long futures position on the CME exchange and thereafter enter into a short futures position having the same underlying symbol and expiration date but listed on the SGXCME exchange, the effect would be the same as if that short position was executed on the CME exchange and that is to close the long position.
MOS also provides margin offset for positions entered into on either of the two exchanges in the manner noted above. Here, for example, a long futures position entered into from the CME exchange would be afforded spread margin treatment against a short position having the same underlying but a different expiration month which was entered into from the the SGXCME exchange. This effect is intended to be similar to that which would take place if both the long and short position were entered into from the same exchange.
IB also offers trading in the identical SGX-listed futures contracts but without the MOS features of fungibility and margin offset as outlined above. In the case of the Yen Denominated Nikkei 225 Index, the contract having the underlying symbol 'SGXNK' and exchange of SGX is the functional equivalent of the 'NIY' contract having the exchange of SGXCME. Similarly, in the case of the USD Denominated Nikkei 225 Index, the contract having the underlying symbol 'N225U' and exchange of SGX is the functional equivalent of the 'NKD' contract having the exchange of SGXCME. It should be noted, however, that a long (short) position of a given expiration entered into on SGX exchange will not close out a short (long) position entered into on the SGXCME, or the CME for that matter. In addition, there is no margin offset provided between SGX-listed and SGXCME or CME contracts.
A table of trading hours for the MOS eligible products is provided below:
|Symbol||Description||Exchange||Trading Hours (ET)*|
|NIY||Yen Denominated Nikkei 225 Index||Globex||
Mon-Fri 16:30 - 16:15 the next day (closing at 15:15 Friday);
Daily maintenance shutdown 17:30 - 18:00
|NIY||Yen Denominated Nikkei 225 Index||SGXCME||Mon - Fri 18:30 - 01:30|
|NKD||USD Denominated Nikkei 225 Index||Globex||Mon-Fri 03:00 - 16:15; 16:30 - 17:30 & 18:00 - 19:00|
|NKD||USD Denominated Nikkei 225 Index||SGXCME||Mon - Fri 02:15 - 09:55 & 18:30 - 01:30|
*Please refer to the respective websites of each exchange for adjustments which take place during periods when US Daylight Savings Time is in effect.
The following provides an example of how currency margins are calculated when determining the funds available for withdrawal.
Margin for Withdrawal Example
In the following example, assume the base currency for the account is USD and the net asset value positions (the sum of the values of all stock, cash, option, etc positions in each currency) are as follows:
Net Asset Value (local currency)
Net Asset Value
(converted to base currency, USD)
(in base currency, USD)
|TOTAL||US $ 46,476||US $2,126|
|Available Funds||US $ 44,350|
The following provides an example of how currency margins are calculated.
Margin for Trading Example
Assume base currency is USD for the below example
1. Determine the base-currency equivalent of net liq values in the account
NetLiq USD Equivalent
EUR: -14,362.69 -19,712.723
KRW: 6,692,613.37 5032.04
USD: 15,073.07 15,073.07
Using exchange rates as follows
EUR USD 0.72860
KRW USD 1330.00000
2. Determine the haircut rates for each currency pair
USD EUR .025
USD KRW .10
EUR KRW .10
3. Determine the largest negative currency balance
4. Sort the haircut rates from smallest to largest
EUR USD 0.025
EUR KRW 0.10
5. Starting with the positive net liq base-currency equivalent with the lowest haircut rate, calculate the margin requirement on that portion which may be used to off-set the negative net liq value
Consume 15,073.07 USD equivalent against the EUR
Margin1 = (15,073.07) x 0.025 = 376.82
6. Repeat step (5) until all negative net liq values have been covered
Remaining negative net liq
-19,712.723 + 15,073.07 = -4,639.65
Consume remaining negative net liq with 4,639.65 USD equivalent of KRW
Margin2 = (4,639.65) x 0.10 = 463.97
Remaining negative net liq
-4,639.65 + 4,639.65 = 0.00
Total margin requirement = Margin1 + Margin2 = 376.82 + 463.97 = 840.79
Accounts which have been set up as a 'Cash' type do not have access to the proceeds from the sale of securities until such time the transaction has settled at the clearinghouse and proceeds have been issued to IB. Securities settlement generally takes place on the third business day following the sale transaction. Providing access to the funds prior to settlement would constitute a loan, a transaction which is precluded from taking place within this account type.
Account holders who wish to have access to settled funds prior to the settlement day may do so by electing an account type of 'Margin'. Under this account type unsettled funds may be used for trading purposes but may not be withdrawn until settlement. Account holders maintaining a 'Cash' account may request an upgrade to a 'Margin' type account by logging into Account Management and selecting the Trading Access and then Trading Configuration menu options. Upgrade requests are subject to a compliance review to ensure that the account holder maintains the appropriate qualifications.
The Preview Order/Check Margin feature offers the ability to review the projected cost, commission and margin impact of an order prior to its transmission. This feature is made available in both the TWS and WebTrader, with the TWS version providing greater detail.
The TWS Check Margin feature provides the ability to isolate the margin impact of the proposed order from one's existing positions and also displays the new margin requirement on the assumption the order is executed. Key margin balances including the Initial and Maintenance Requirements are reported as is the Equity With Loan Value. To use this feature, place your cursor on the order line, right-click on the mouse button and select Check Margin from the drop-down menu.
Example: Buy 1 ES June 2012 Future @ 1387.25
The first section of the Order Preview displays the bid, ask, and last trade price for the security.
The second section displays the basic order details
The Amount section shows the value of the order as well as the applicable commission estimate.
The Margin Impact section displays a breakdown of the following;
Current = The current account values, excluding the order being transmitted.
Change = The effect of the order being submitted ignoring any positions in the account.
Post-Trade = The anticipated account values when the order being transmitted has been executed and incorporated into the account portfolio.
The WebTrader order preview displays the equivalent of the TWS Post-Trade values only.