SMA refers to the Special Memorandum Account which represents neither equity nor cash but rather a line of credit created when the market value of securities in a Reg. T margin account increase in value. For example, assume the market value of securities purchased at a cost of $10,000 on margin (at 50%) increase in value to $12,000. This $2,000 increase in market value would create SMA of $1,000, which provides the account holder the ability to either: 1) buy additional securities valued at $2,000 (assuming a 50% margin rate) without depositing up additional funds; or 2) withdraw $2,000 in cash, which may be financed by increasing the debit balance if the account holds no cash.
It should be noted that while an increase in market value over original cost creates SMA, a subsequent decline in market value has no effect on SMA. SMA will only decline if used to purchase securities or withdraw cash and the only restriction with respect to its use is that the additional purchases or withdrawals do not bring the account below the maintenance margin requirement. SMA will also increase on a dollar for dollar basis in the event of cash deposits or dividends.
Broker to broker transfers for US securities are conducted via a process known as the Automated Customer Account Transfer Service or ACATS. This process generally takes between 4 to 8 business days to complete in order to accommodate the verification of the transferring account and positions. The request is always initiated via the receiving broker (IB in this case) and can be prompted by following the steps below.
1. Log into Account Management and select the Funds Transfer and then Position Transfers menu options.
2. From the Transfer Method drop-down list select ‘ACATS'.
3. From the Type drop-down list select either ‘Full’ or ‘Partial'.
a. Note that the ‘Full’ election does not require that you specify any assets as an attempt will be made to transfer your account in its entirety. Account holders should note, however, that certain positions may not be on the list of securities eligible to trade at IB and others, while transferable, may be subject to a house margin requirement higher than that of the delivering broker. In the event IB receives an asset list from the delivering broker which includes ineligible positions or the aggregate of the positions transferred are such that a margin deficit would exist were the transfer to occur, IB will attempt to contact you to remedy the situation within the allocated time frame after which an automatic reject of the full transfer would take effect. Account holders may wish to minimize potential delays or problems associated with a ‘Full’ transfer request by verifying security eligibility and margin requirements via the Contract Search link located at the upper right hand corner of the IB homepage prior to initiating the transfer.
b. Note that the ‘Partial’ election will require that you specify the positions you wish to transfer on step 5.
4. From the Source drop-down list select the delivering broker. Note that certain brokers maintain multiple Participant account numbers with DTCC and account holders are encouraged to confirm with their delivering broker the account number to be associated with the transfer request.
5. On the Deposit & Transfers/ACATS Request form enter the account number as reflected on your delivering broker account statement and respond to questions regarding the existence of a margin loan, short positions and option positions. Note that certain short stock positions may not be transferable if IB is unable to locate and borrow. In the event of a ‘Partial’ election, you will need to provide additional detail (product identification, number of shares/contracts, long/short designation) as to the stock, option, mutual fund, bond or cash position you wish to transfer.
6. Provide electronic signature authorizing the transfer.
Please note that brokers generally freeze the account during the transfer period to ensure an accurate snapshot of assets to transfer and may restrict the transfer of option positions during the week prior to expiration. You may wish to check with the delivering broker to verify their policy in this regard. In addition, please note if your IB account is currently maintaining positions on margin, any cash withdrawals or adverse market moves could increase the likelihood that your account falls out of margin compliance during the transfer period which may delay or prevent completion of the transfer.
Applicants may meet the initial account funding requirement through the transfer of securities positions and/or cash via the ACATS system.
The processing of exercise notices for American style options on days other than the expiration date is not performed on a real-time basis, but rather as part of a nightly batch process by the Options Clearing Corporation (OCC). The processing sequence, which by definition results in a notification lag of at least one day to the assigned customer, is as follows:
- OCC generally allows its clearing members to submit exercise notices on behalf of the customers holding a long position electronically throughout the day, but generally no later that the start of their critical processing in the evening (Day E).
- As part of its evening position processing sequence, OCC randomly assigns the exercise notices it has received to the open interest of its clearing members. That information is then made available by OCC to its clearing members early in the morning on the following day (Day E+1).
- At the point in which that information has been made available, clearing firms such as IB have already completed their processing of that day’s trade activity in order to provide timely statements, margin and settlement information to their clients. Also, since OCC carries the customer positions of its clearing members in an omnibus manner (i.e., they do not know the identity of the customers, only the clearing firm), the clearing member must, in turn, execute a random process to assign those exercise notices to customers holding a short position in that particular option series.
- Once IB receives notice of the assignment from OCC and completes its random assignment process, the assignments will be readily posted to the Trader Workstation of the impacted accounts and reflected on the Daily Activity Statement as of that day’s close (E+1).
In addition, due to this processing sequence and the fact that a long option may have remaining time value, IB cannot automatically provide an exercise notice to OCC for any long option spread against the assigned short option as a means of offsetting the ensuing delivery obligation.
Account holders should refer to the Characteristics and Risks of Standardized Options disclosure document which is provided by IB to every option eligible customer at the point of application and which clearly spells out the risks of assignment. This document is also available online at OCC's web site.
A short stock position may originate from an option position which you held in your account. For example, if you hold a long put position in your account, that position may be subject to automatic exercise by the clearinghouse if it is in-the-money by a defined threshold at expiration. This put exercise will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date.
Similarly, a short call position in your account is subject to assignment should a call purchaser elect to exercise their right to purchase the stock and your account be allocated through the random clearinghouse and broker assignment process. This call assignment will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date.
These payments will be reflected on your Activity Statement as a 'Payment In Lieu Of Dividend'.