As a U.S. broker-dealer registered with the Securities & Exchange Commission (SEC) for the purpose of facilitating customer securities transactions, IB LLC is subject to various regulations relating to the extension of credit and margining of those transactions. In the case of foreign equity securities (i.e., non-U.S. issuer), Reg T. allows a U.S. broker to extend margin credit to those which either appear on the Federal Reserve Board's periodically published List of Foreign Margin Stocks, or are deemed to have a have a "ready market" under SEC Rule 15c3-1 or SEC no-action letter.
Prior to November 2012, "ready market" was deemed to include equity securities of a foreign issuer that are listed on what is now known as the FTSE World Index. This definition was based upon a 1993 SEC no-action letter and was premised upon the fact that, while there may not have been a ready market for such securities within the U.S., the securities could be readily resold in the applicable foreign market. In November of 2012, the SEC issued a follow-up no-action letter (www.sec.gov/divisions/marketreg/mr-noaction/2012/finra-112812.pdf) which expanded the population of foreign equity securities deemed to have a ready market to also include those not listed on the FTSE World Index provided that the following four conditions are met:
1. The security is listed on a foreign exchange located within a FTSE World Index recognized country, where the security has been trading on the exchange for at least 90 days;
2. Daily bid, ask and last quotations for the security as provided by the foreign listing exchange are made continuously available to the U.S. broker through an electronic quote system;
3. The median daily trading volume calculated over the preceding 20 business day period of the security on its listing exchange is either at least 100,000 shares or $500,000 (excluding shares purchased by the computing broker);
4. The aggregate unrestricted market capitalization in shares of the security exceed $500 million over each of the preceding 10 business days.
Note: if a security previously meeting the above conditions no longer does so, the broker is provided with a 5 business day window after which time the security will no longer be deemed readily marketable and must be treated as non-marginable.
Foreign equity securities which do not meet the above conditions, will be treated as non-marginable and will therefore have no loan value. Note that for purposes of this no-action letter foreign equity securities do not include options.
Below is a listing of some of the more commonly used margin terms:
Equity with Loan Value (ELV) – Forms the basis for determining whether a client has the necessary assets to either initiate or maintain security positions. Equals cash + stock value + bond value + mutual fund value + European and Asian options value (excludes market value U.S. securities & futures options and cash maintained in futures segment).
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.
IB's margin compliance policy does not allow for transfers or other deposits if there is a margin violation/deficit in the account. In the case of a margin violation/deficit, the account in deficit is immediately subject to liquidation. Automated liquidations are accomplished with market orders, and any/all positions in the account can be liquidated. There are cases where, due to specific market conditiions, a deficit is better addressed via a manual liquidation.
Funds deposited or wired into the account are not taken into consideration from a risk standpoint until those funds have cleared all the appropriate funds and banking channels and are officially in the account. The liquidation system is automated and programmed to act immediately if there is a margin violation/deficit.
There are many different formulas used to calculate the margin requirement on options. Which formula is used will depend on the option type or strategy determined by the system. There are a significant number of detailed formulas that are applied to various strategies. To find this information go to the IB home page at www.interactivebrokers.com. Go to the Trading menu and click on Margin. From the Margin Requirements page, click on the Options tab. There is a table on this page which will list all possible strategies, and the various formulas used to calculate margin on each.
The information above applies to equity options and index options. Options on futures employ an entirely different method known as SPAN margining. For information on SPAN margining, conduct a search on this page for “SPAN” or “Futures options margin”.
When an account holder sells a marginable security, it will typically increase their SMA by 50% of the value of the security sold.
When an account is in margin deficit, it is subject to liquidation in real-time. Any and all positions can be immediately liquidated. Automated liquidations are accomplished with market orders, and any/all positions in the account can be liquidated. The system which determines whether an account is in margin violation is entirely automated, and governed by a mathematical algorithm. Once an account is determined to be in margin violation, either the system will automatically liquidate positions based on a proprietary algorithm or, if market conditions are better served by manual liquidations in specific instruments, then liquidation orders will be manually transmitted. Liquidations can occur at any market interval, whether positive or negative for the account holder.
The majority of all liquidations occur due to margin violations. There are two main types of margin violations that apply to margins accounts, Maintenance Margin and Reg. T Margin.
In addition to a margin deficit, liquidations may occur as a result of post expiration exposure or various other account-specific reasons which may be dependent upon the account type as well as the specific holdings within the account. For a detailed list of Risk Management algorithms applied to ensure account compliance and which may result in account liquidations, please review IB's website, under Trading - Margins.
1. Maintenance Margin violation: In an account, the Equity with Loan Value (ELV) must always be greater than the Current Maintenance Margin Requirement (MMR) on the positions that are being held in the account. The difference between ELV and MMR is Current Excess Liquidity; therefore an easier way for some people to monitor their account is to remember that the Current Excess Liquidity in their account must always be positive. If the Current Excess Liquidity in an account goes negative, this is a maintenance margin violation.
2. Reg T violation: In the Balances section of the Account Window there is a figure titled Special Memorandum Account (SMA). The U.S. Fed has an enforcement period for this account; 15:50-16:15 EST each trading day. During this 25 minute window, the SMA balance must be positive. If the SMA is negative at any point between 15:50 and 17:20 EST, this constitutes a Reg T margin violation.
In the event of a margin violation, the account is subject to automatic liquidation on a real-time basis. Liquidations are accomplished with market orders, and any/all positions in the account can be liquidated.
Portfolio Margining accounts reporting net liquidating equity below USD 100,000 are limited to entering trades which serve solely to reduce the margin requirement until such time as either: 1) the equity increases to above 100,000 or 2) the account holder requests a downgrade to Reg T style margining through Account Management (select the Trading Access and then trading Configuration menu options).
If a Portfolio Margining eligible account reporting net liquidating equity below USD 100,000 enters an order which, if executed, would serve to increase the margin requirement, the following TWS message will be displayed: "Your order is not accepted, margin requirement increase not allowed. Equity with loan value is less than 100,000.00 USD."
Please note that requests to downgrade to reg T will become effective the following business day if submitted prior to 4:00 ET. Also note that as the Reg T margining methodology generally affords less leverage than does Portfolio Margining, requesting a downgrade may lead to the automatic liquidation of positions in your account in order to comply with Reg T. You will receive a warning message if that is the case at the time you request the downgrade.
In order to enabled for portfolio margining an account must be approved for option trading and must have at least USD 100,000 in net liquidating equity. Account holders will also be required to acknowledge and sign the Portfolio Margin Risk Disclosure document and be bound by its terms.
Portfolio margining may be requested through the on-line application phase (in the Account Configuration step) or after the account has been approved. To apply once the account has already been approved, log into Account Management and select the Trading Access and then Trading Configuration menu items. There you may choose the portfolio margin treatment which will initiate the approval process. Please note that requests are subject to review (generally a 1-2 day process) and may be declined for various reasons including a projected increase in margin upon upgrade from Reg T to Portfolio Margining. Also note that accounts approved for portfolio margining but maintaining net liquidating equity below the USD 100,000 threshold will remain subject to Reg T margining and not have portfolio margining applied until such time the net liquidating value of the account exceeds USD 100,000.