Monitoring Stock Loan Availability

Übersicht: 

IB provides a variety of methods to assist account holders engaged in short selling with monitoring inventory levels and borrow costs/rebates. The level of detail available, the time frame covered and the manner in which the information is accessed vary by method and a brief overview of each is provided below.

Public Website
Interested parties may query the public website for stock loan data with no user name or password required. To start, click here and select the country in which the stock is listed. If the number of available issues exceeds that which can be reasonably presented on a single page, results will be organized by symbol in groups, with hypertext links allowing further drill-down. A quick search box allowing direct query for a given symbol is also provided. Query results include the product description, currency of denomination and a link titled “Check Availability” which displays the quantity of shares available to borrow.


 

Public FTP
The public FTP site also requires no user name or password to access and provides stock borrow data in bulk form via a pipe delimited text file. The URL necessary to request files varies by browser type as outlined below:


1. Mozilla Firefox
ftp://shortstock: @ftp3.interactivebrokers.com (Note there is a space between shortstock: and @ which represents the password).
You will get a message stating that you are about to connect to a website that does not require authentication. Select "Yes"

2. Internet Explorer
ftp://shortstock: @ftp3.interactivebrokers.com (Note there is a space between shortstock: and @ which represents the password).
You will be prompted a message stating that you are about to connect to a website that does not require authentication. Select "Yes"

3. Google Chrome
ftp://ftp3.interactivebrokers.com
Username:shortstock
Password: blank (n/a)
Within the site, individual files will be organized by country of listing with checkboxes provided to specify those desired which can then be downloaded into a single file by selecting the Submit button.
 

 

Outlined below is a snapshot of the sample file output which includes the stock symbol, currency of denomination, name, contract identifiers (IB’s and the ISIN), rebate & fee rates and shares available. This file may be also imported into applications such as Excel for sorting, filtering and analytical purposes.

 

Stock Loan Borrow (SLB) Tool
The SLB tool is made available to IB account holders through login to Account Management (Support then Tools menu options). This tool allows one to query information on a single stock as well as at a bulk level. Single stock searches can be performed by symbol/exchange, ISIN or CUSIP numbers. At the single security level, query results include the quantity available, number of lenders and indicative rebate rate (which if negative, infers a borrowing cost expressed as an annual percentage rate and, if positive, the interest rebate paid on cash proceeds securing the loan in excess of the minimum threshold). Information regarding the quantity of shares available to borrow throughout the day for the most current and past half hour increments is also made available.


 

In addition, borrowers interested in the trend of rates over the prior 10 day period can view the minimum, maximum and mean rates for each day.

This tool also allows one to upload a text file (with symbol/exchange or ISIN detail) and search for availability of multiple stocks in bulk within a single query. These bulk requests will then generate a .CSV file similar to the sample file output made available through the public FTP site.

香港淡倉申報義務

本文是對香港證券及期貨事務監察委員會(“SFC”)有關特定香港掛牌證券的賣空及大量空頭持倉的相關規則條例的總結。盈透提供下列信息是為方便客戶,不擔保信息的絕對準確或完整。這些規則可能會有後續更改,持有大量空頭頭寸的投資人應直接訪問SFC網站查看SFC規定。

 

概述

  • 香港規則條例現要求凡持有恆生指數、恆生中國企業指數成分股及其他SFC指定的金融公司特定香港掛牌股票的空頭頭寸價值超過三千萬港幣、或超過股票市值的0.02%的股票實益擁有人,每週將這些頭寸上報。受此規則限制的股票列出如下:http://www.sfc.hk/sfc/html/EN/research/short-position-reporting/specified-shares.html
  • 所持頭寸受此規則限制的投資人應直接在SFC註冊。註冊、註冊過程說明均在下列連結中註明。
  • 申報必須每週進行,在後一周的第二個工作日末前完成。
  • 註冊及申報連結請見:    https://portal.sfc.hk/dsp/gateway/welcome?data=J5ndmByBws8SeLRb0wX5rJfrBkk%2F3KtEGW%2BpWTkD9Gw%3D

 

準則、說明及常見問題集合:

帶有法規連結的SFC公告

空頭頭寸淡倉表格、準則、參考資料及指定股票列表

訂閱SFC警報服務 (選擇空頭頭寸申報相關事宜)

法規與規則

要了解更多詳情,請訪問SFC網站:http://www.sfc.hk/sfc/html/TC 及/或將特定問題通過電郵提交到 shortpositions@sfc.hk

 

 

香港淡仓申报义务

本文是对香港证券及期货事务监察委员会(“SFC”)有关特定香港挂牌证券的卖空及大量空头持仓的相关规则条例的总结。盈透提供下列信息是为方便客户,不担保信息的绝对准确或完整。这些规则可能会有后续更改,持有大量空头头寸的投资人应直接访问SFC网站查看SFC规定。

概述 

  • 香港规则条例现要求凡持有恒生指数、恒生中国企业指数成分股及其他SFC指定的金融公司特定香港挂牌股票的空头头寸价值超过三千万港币、或超过股票市值的0.02%的股票实益拥有人,每周将这些头寸上报。受此规则限制的股票列出如下:

http://www.sfc.hk/sfc/html/EN/research/short-position-reporting/specifie...

  • 所持头寸受此规则限制的投资人应直接在SFC注册。注册、注册过程说明均在下列链接中注明。
  • 申报必须每周进行,在后一周的第二个工作日末前完成。
  • 注册及申报链接请见:

https://portal.sfc.hk/dsp/gateway/welcome?data=J5ndmByBws8SeLRb0wX5rJfrB...

准则、说明及常见问题集合:

带有法规链接的SFC公告
空头头寸表格、准则、参考资料及指定股票列表
订阅SFC警报服务(选择空头头寸申报相关事宜)
法规与规则
要了解更多详情,请访问SFC网站:http://sc.sfc.hk/gb/www.sfc.hk/sfc/html/TC/及/或将特定问题通过电邮提交到shortpositions@sfc.hk

 

 

Hong Kong Short Reporting Obligations

This Article is a general summary of the Hong Kong Securities and Futures Commission’s (“SFC”) regulatory position relating to the short selling and the carrying of large short positions in selected HK listed securities. The following information is being provided as a service convenience and IB does not guarantee the information for either accuracy or completeness. There may be subsequent changes to the regulations, and investors with large short positions should refer directly to the SFC regulations on the SFC website. 

 

Overview

  • Hong Kong regulations now require beneficial owners of shares in selected HK listed stocks to report each week short positions that exceed the threshold of HKD 30 million or 0.02% of market capitalization on the constituent stocks of the Hang Seng Index, the Hang Seng China Enterprises Index and other financial companies specified by the SFC. A list of affected of stocks can be found here:

http://www.sfc.hk/sfc/html/EN/research/short-position-reporting/specified-shares.html 

  • Investors with applicable positions should register directly with the SFC. Registration and guidance on the registration process can be found here.
  • Reporting is expected on a weekly basis, but the second business day of the following week.
  • Links for the registering and reporting can be found here:

https://portal.sfc.hk/dsp/gateway/welcome?locale=en

Guidelines, Instructions and FAQ's:

SFC announcement with links to legislation

Short position forms, guidelines, reference material and list of specified shares

Link to subscribe to SFC alert service (choose Short Position Reporting Related Matters)

Legislation and Rules

For further details, please refer to the SFC website: www.sfc.hk and/or contact them via email with specific questions at shortpositions@sfc.hk

 

 

IB Stock Yield Enhancement Program

PROGRAM OVERVIEW

The Stock Yield Enhancement Program (SYEP) offers participants the opportunity to earn additional income on their full-paid shares by lending those shares to IB in exchange for a portion of the fees short sellers are willing to pay to borrow them.  Upon enrollment, Program activities are managed in their entirety by IB and require no actions on the part of participants.  These activities include the following:

- Identifying the shares in client accounts which borrowers are attempting to locate;

- Establishment of loans and returns;

- Crediting of loan fee income (expressed as an interest accrual for activity statement reporting purposes); and

- Reporting of loan activity, cash collateral transfers and income on the activity statements;

In contrast to the securities lending programs offered by others, IB provides complete transparency as to the market rate and gross fees earned from each transaction which will be split equally between the client and IB.

 

HOW IT WORKS

- Clients may enroll in the Program by logging into Account Management and selecting the Trading Access and then Trading Configuration menu options and then checking the box marked Stock Yield Enhancement Program.  Activation generally takes place overnight. Eligible accounts include any IB LLC or IB UK margin accounts and IB LLC or IB UK cash accounts with equity in excess of USD 50,000.

- Once activated, IB will review on a daily basis the inventory of eligible shares held by the participant vis-a-vis that which is necessary to satisfy internal and external borrow demand.  If the supply of eligible shares exceeds borrow demand, clients will be allocated loans on a pro rata basis (e.g. if aggregate supply is 20,000 shares and aggregate demand 10,000, each client will be eligible to have 50% of their shares loaned).

- At the end of each day that any loan is in place, the client will receive a payment presented as an interest accrual which is credited to equity and which represents 1/2 of gross lending fee charged to the end borrower.  The remaining 1/2 accrues to IB as compensation for managing the loan. The details regarding the transaction, including the quantity of shares loaned, collateral amount, market fee rate, gross fee, IB management charge and net fee are reflected on the daily activity statement.

- Clients maintain full control of loaned shares with no impairment as to:

          * Market exposure ( i.e., will continue to recognize profit or loss consistent with stock price move);

          * The ability to sell at any time without prior notice;

          * Hedges (e.g., covered calls, protective puts);

          * The representation of holdings in statements and the trading platform; and

          * Cost basis

 

SPECIAL CONSIDERATIONS

- Loaned shares may not be protected by SIPC, however, the cash collateral received for the loaned securities is segregated within the 15c3-3 Reserve Account and therefore subject to the same investment restrictions;

- The market fee rate for any given loan is subject to supply and demand considerations that are outside the control of IB and which are susceptible to change from one day to another without advance notice or limit as to the magnitude of change.  The net fee income available to participants will reflect such changes;

- Proxy voting rights on loaned shares are forfeited (rights go to borrower);

- Participants may not receive actual dividends on loaned shares but instead a cash payment equivalent to the full dividend to be paid on the same date as the dividend (referred to as a 'Payment in Lieu'). As a Payment in Lieu is treated differently than a dividend for U.S. tax reporting purposes, certain taxpayers may not receive the more favorable tax treatment afforded to dividend payments deemed 'qualified'.  IB generally seeks to avoid this consequence for SYEP participants by recalling shares 10 days prior to record date, so the actual dividend is paid, but this is not guaranteed.

- Loaned shares are typically used to facilitate short sales and such transactions may affect the value of shares.

 

For additional FAQs relating to the Yield Enhancement Program, click here.

 

Stock Yield Enhancement Program FAQs

What is the purpose of the Stock Yield Enhancement Program?
The Stock Yield Enhancement program provides customers with the opportunity to earn additional income on securities positions which would otherwise be segregated (i.e., fully-paid and excess margin securities) by permitting IB to lend out those securities to third parties. Customers who participate in the program will receive a portion of the fee paid by the borrower as loan compensation for any day the loan exists and will receive cash collateral to secure the return of the stock loan at its termination.

 

What are fully-paid and excess margin securities?
Fully-paid securities are securities in a customer’s account that have been completely paid for. Excess margin securities are securities that have not been completely paid for, but whose market value exceeds 140% of the customer’s margin debit balance.

 

How is the income received by a customer on any given Stock Yield Enhancement Program loan transaction determined?
The income which a customer receives in exchange for shares lent depend upon loan rates established in the over-the-counter securities lending market. These rates can vary significantly not only by the particular security loaned but also by the loan date. In addition, IB assesses a Management Fee equal to 50% of the net loan fees paid in exchange for initiating, terminating and managing transactions. In determining the customer’s portion of these fees, the Market Fee Rate % is applied to the loan collateral and this daily Gross Lending Fee is split equally between IB and the customer.  For example, assume loan collateral of $10,000 and an annualized Market Fee Rate of 15%. In this example the daily Gross Lending Fee would be $4.16 (($10,000 *.15)/360), of which $2.08 would accrue to the customer and $2.08 to IB as its Management Fee. Lending fees are calculated and accrued daily similar to interest credits.

 

How is the amount of cash collateral for a given loan determined?
The cash collateral underlying the security loan and used for determining interest payments is determined using standard industry convention whereby the closing price of the stock is multiplied by 102% and then rounded up to the nearest whole dollar. For example, a loan of 100 shares of a stock which closes at $59.24 would be equal to $6,100 ($59.24 * 1.02 = $60.4248; round to $61, multiply by 100).

 

What are the eligibility requirements for participation in the IB Stock Yield Enhancement Program?
All IB LLC and IB UK margin accounts or IB LLC and IB UK cash accounts with equity over $50,000 at the time of application are eligible. IB Canada, IB Japan and IB India customers are not eligible. Japanese and Indian clients maintaining accounts with IB LLC are eligible.


In addition, Financial Advisor client accounts, fully disclosed IBroker clients, non-disclosed IBroker clients and Omnibus Brokers who meet the above requirements can participate. In the case of Financial Advisors and fully disclosed IBrokers, the clients themselves must sign the agreements. For non-disclosed IBroker and Omnibus Brokers, the broker signs the agreement.

 

Are IRA accounts eligible to participate in the Stock Yield Enhancement Program?
Yes.

 

How do I enroll in the IB Stock Yield Enhancement Program?
Clients who are eligible and who wish to enroll in the Stock Yield Enhancement Program may do so by selecting Trading Access and then Trading Configuration from Account Management and then checking the box on the Trading Permissions matrix titled "United States (Stock Yield Enhancement Program)".

 

What happens if equity in a participating cash account falls below the $50,000 qualifying threshold?
The cash account must meet this minimum equity requirement solely at the point of signing up for the program. If the equity falls below that level thereafter there is no impact upon existing loans or the ability to initiate new loans.

 

What is the difference between AQS and the IB Stock Yield Enhancement Program?
Clients lending through AQS participants self-direct their activity based upon information provided via AQS’ automated centralized market. In contrast, loans transacted through the Stock Yield Enhancement Program are determined and managed by IB.

 

Can I participate in both AQS and the IB Stock Yield Enhancement Program?
Clients can only lend in one program at a time. If, for example, a client signs up for the Yield program and is already approved for AQS lending, we will disable their ability to lend at AQS and recall their loans. They will still, however, retain the ability to borrow through AQS and can see market data. If the client disables the Yield Enhancement Program, their AQS loan permissions will be re-enabled. In sum, the yield program always takes precedence.

 

If my account is eligible for AQS am I automatically eligible to participate in the IB Stock Yield Enhancement Program?
No.

 

If my account is eligible for the IB Stock Yield Enhancement Program am I automatically eligible to participate in AQS?
No.

 

How does one terminate Stock Yield Enhancement Program participation?
Clients who wish to terminate participation in the Stock Yield Enhancement Program may do so by selecting Trading Access and then Trading Configuration from Account Management and then removing the check from the box on the Trading Permissions matrix titled "United States (Stock Yield Enhancement Program)".
Requests to terminate are typically processed at the end of the day.

 

What types of securities positions are eligible to be lent?
Eligible securities include U.S. common stocks (exchange listed, PINK and OTCBB), ETFs, preferred stocks and corporate bonds. Municipal bonds and non-U.S. securities are not eligible.

 

Is there any restriction on lending stocks which are trading in the secondary market following an IPO?
No, as long as IB is not part of the selling group.

 

How does IB determine the amount of shares which are eligible to be loaned?
The first step is to determine the value of securities, if any, which IB maintains a margin lien upon and can lend without client participation in the Stock Yield Enhancement Program. A broker who finances client purchases of securities via margin loan is allowed by regulation to loan or pledge as collateral that client’s securities in an amount up to 140% of the cash debit balance. For example, if a client maintaining a cash balance of $50,000 buys securities having a market value of $100,000, the debit or loan balance will be $50,000 and the broker holds a lien on 140% of that balance or $70,000 of securities. Any securities held by the client in excess of that amount are referred to as excess margin securities ($30,000 in this example) and are required to be segregated unless the client provides IB the authorization to lend through the Stock Yield Enhancement Program.

The debit balance is determined by first converting all non-USD denominated cash balances to USD and then backing out any short stock sale proceeds (converted to USD as necessary). If the result is negative then we free up 140% of that negative number. In addition, cash balances maintained in the commodities segment or for spot metals and CFDs are not considered.

EXAMPLE 1: Customer is long EUR 100,000 in a USD Base Currency account with a EUR.USD rate of 1.40. Customer purchases USD denominated stock valued at $112,000 (EUR 80,000 equivalent). All securities are deemed fully-paid as cash balance as converted to USD is a credit.

Component EUR USD Base (USD)
Cash 100,000 (112,000) $28,000
Long Stock   $112,000 $112,000
NLV     $140,000

EXAMPLE 2: Customer holds long USD of 80,000, long USD denominated stock of $100,000 and short USD denominated stock of $100,000. Long securities totaling $28,000 are deemed margin securities and the remainder of $72,000 excess margin securities. This is determined by subtracting the short stock proceeds from the cash balance ($80,000 - $100,000) and multiplying the resultant debit by 140% ($20,000 * 1.4 = $28,000)

Component Base (USD)
Cash $80,000
Long Stock $100,000
Short Stock ($100,000)
NLV $80,000

 

Will IB lend out all eligible shares?
There is no guarantee that all eligible shares in a given account will be loaned through the Stock Yield Enhancement Program as there may not be a market at an advantageous rate for certain securities, IB may not have access to a market with willing borrowers or IB may not want to loan your shares.

 

Are Stock Yield Enhancement Program loans made only in increments of 100 (similar to AQS)?
No. Loans can be made in any whole share amount although externally we only lend in multiples of 100 shares. Thus the possibility exists that we would lend 75 shares from one client and 25 from another should there be external demand to borrow 100 shares.

 

How are loans allocated among clients when the supply of shares available to lend exceeds the borrow demand?
In the event that the demand for borrowing a given security is less than the supply of shares available to lend from participants in our Yield Enhancement Program, loans will be allocated on a pro rata basis (e.g. if aggregate supply is 20,000 and demand is 10,000, each client will be eligible to have 50% of his/her shares lent)

 

Are shares loaned only to other IB clients or to other third parties?
Shares may be loaned to any counterparty and is not limited solely to other IB clients.

 

Can the Stock Yield Enhancement Program participant determine which shares IB can lend?
No. The program is entirely managed by IB who, after determining those securities, if any, which IB is authorized to lend by virtue of a margin loan lien, has the discretion to determine whether any of the fully-paid or excess margin securities can be loaned out and to initiate the loans.

 

Are there any restrictions placed upon the sale of securities which have been lent through the Stock Yield Enhancement Program?
Loaned shares may be sold at any time, without restriction. The shares do not need to be returned in time to settle your sale of the share and proceeds from the sale are credited to the client’s account on the normal settlement date. In addition, the loan will be terminated on the open of the business day following the security sale date.

 

Can a client write covered calls against stock which has been loaned out through the Stock Yield Enhancement Program and receive the covered call margin treatment?
Yes. A loan of stock has no impact upon its margin requirement on an uncovered or hedged basis since the lender retains exposure to any gains or losses associated with the loaned position.

 

What happens to stock which is the subject of a loan and which is subsequently delivered against a call assignment or put exercise?
The loan will be terminated on T+1 of the action (trade, assignment, exercise) which closed or decreased the position.

 

What happens to stock which is the subject of a loan and which is subsequently halted from trading?
A halt has no direct impact upon the ability to lend the stock and as long as IB can continue to loan the stock, such loan will remain in place regardless of whether the stock is halted.

 

Can the cash collateral from a loan be swept to the commodities segment to cover margin and/or variation?
No. The cash collateral securing the loan never impacts margin or financing.

 

What happens if a program participant initiates a margin loan or increases an existing loan balance?
If a client maintains fully-paid securities which have been loaned through the Stock Yield Enhancement Program and subsequently initiates a margin loan, the loan will be terminated to the extent that the securities do not qualify as excess margin securities. Similarly, if a client maintaining excess margin securities which have been loaned through the program increases the existing margin loan, the loan may again be terminated to the extent that the securities no longer qualify as excess margin securities.

 

Under what circumstances will a given stock loan be terminated?
In the event of any of the following, a stock loan will be automatically terminated:

- If the client elects to terminate program participation
- Transfer of shares
- Borrowing of a certain amount against the shares
- Sale of shares
- Call assignment/put exercise
- Account closure

 

Do participants in the Stock Yield Enhancement Program receive dividends on shares loaned?
While the lender of the securities is entitled to receive the amount of all dividends and distributions made on loaned securities, they may receive cash payments, commonly referred to PILs, in lieu of dividends. Depending upon ones holding period for the shares loaned, the receipt of a PIL may have an adverse tax impact for certain U.S. taxpayers as such payments are taxed as ordinary income rather than at the reduced rate associated with qualified dividends.  IB will attempt to mitigate the payment of PILs by recalling shares prior to a dividend, however, IB cannot guarantee that the borrower will be able to return the shares within the necessary time frame to avoid PIL treatment.

 

Do participants in the Stock Yield Enhancement Program retain voting rights for shares loaned?

No. the borrower of the securities has the right to vote or provide any consent with respect to the securities if the Record Date or deadline for voting, providing consent or taking other action falls within the loan term.

 

How are loans reflected on the activity statement?

Loan collateral, shares outstanding, activity and income is reflected in the following 6 statement sections:


1. Cash Detail – details starting cash collateral balance, net change resulting from loan activity (positive if new loans initiated; negative if net returns) and ending cash collateral balance.
 

 

2. Net Stock Position Summary – for each stock details total Shares at IB, the number of Shares Borrowed, the number of Shares Lent (through AQS or the Stock Yield Enhancement Program) and the Net Shares (=Shares at IB + Shares Borrowed - Shares Lent).

 

3. IB Managed Securities Lent – lists for each stock loaned through AQS or the Stock Yield Enhancement Program the Quantity of shares loaned, the Net Fee Rate (%) and the Collateral Amount.

 

4. IB Managed Securities Lent Activity – details the loan activity for each security including Loan Return Allocations (i.e., terminated loans); New Loan Allocations (i.e., initiated loans); the share Quantity; the Net Fee Rate (%) and the Collateral Amount.

 

5. IB Managed Securities Lent Activity Fee Details – details on an individual loan basis the Market Fee Rate (%); the Gross Lend Fee (represents the total fee charged to the borrower which is equal to {Collateral Amount * Market Fee Rate}/360); the IB Management Charge (equals 50% of the Gross Lend Fee); the Net Lend Fee Rate (represents the half of the Market Fee Rate which the client earns) and the Net Lend Fee (represents the client’s portion of the fee income. Equals the Gross Lend Fee - IB Management Charge).
Note: This section will only be displayed if the Net Lend Fee accrual exceeds USD 1 for the statement period.  

 

6. Interest Accruals – the loan fee income is accounted for here as an interest accrual and is treated as any other interest accrual (aggregated but only displayed as an accrual when exceeding $1 and posted to cash monthly). For year-end reporting purposes, this fee income will be reported as miscellaneous income on the Form 1099 issued to U.S. taxpayers.

 

India Intra-Day Shorting Risk Disclosure

Interactive Brokers currently offers the ability to short sell stocks before taking delivery on an intra-day basis. In accordance with IB’s intra-day shorting rules, traders are required to deliver shares sold or close short stock positions prior to the end of the trading session. 

Should traders establish a short stock position intra-day and still hold the position ten minutes prior to the end of the trading session at 15:20 IST, Interactive Brokers may, on a best efforts basis, close the position on your behalf. If the position is not closed by the end of the day and the shares are not delivered by the customer before settlement, the loss on account of auction will be borne by the customer. Please note that prices in the auction market are highly variable and typically not favorable compared to the normal market.

It is important to note, IB will not take into consideration any closing orders for short stock positions placed by the customer which may still be working. If your account holds a short position ten minutes prior to the end of the trading session and you have placed working orders to close those positions, there is the possibility your closing order will execute and that IB will act to close out your short position.  In this situation you will be responsible for both executions and will need to manage your long position accordingly.

A fee of INR 1,500 will be charged for this manual processing in addition to any external penalties in the case of short stock positions resulting in auction trades.  As such, we strongly urge customers to monitor their positions and take appropriate action themselves in order to avoid this.

Reg. SHO Short Sale Bid Test

Effective November 10, 2010, an amendment to SEC Reg. SHO goes into effect which will place certain restrictions on short selling when a given stock is experiencing significant downward price pressure.  This amendment, referred to as the alternative uptick rule (Rule 201) introduces a circuit breaker which takes effect wherever the primary listing market declares that a stock has declined 10% or more from the prior day’s closing price. 

Once the circuit breaker has been triggered, a Price Restriction is imposed which prohibits the display or execution of a short sale transaction if the order price is at or below the current national best bid. As a result, short sellers will not be allowed to act as liquidity takers when the Price Restriction applies and can only participate as liquidity providers adding depth to the market.  Individuals owning and attempting to sell a security subject to a Price Restriction (i.e., long sellers) are afforded a priority over short sellers in that while they are similarly prohibited from displaying or executing a sale transaction at a price below the current national best bid, they may display or execute orders at the bid.  Accordingly, long sellers are allowed to act as liquidity takers. 

The Price Restriction will apply to all short sale orders in that security for the remainder of the day as well as the following trading day.  Note that while the Price Restriction can only be triggered during regular trading hours, the restriction itself extends beyond regular trading hours on both the first and second days. In addition, there is no limit on the number of consecutive days in which a primary listing market can trigger a Price Restriction. If a stock currently subject to a Price Restriction again declines 10% or more from the prior day’s closing price, the restriction will be re-triggered for the remainder of that day as well as the following trading day.  

Rule 201 applies to all National Market System (NMS) securities; that is, stocks listed on a U.S. stock exchange whether traded on an exchange or in the over-the-counter market.  It does not apply to stocks which are traded only on the OTCBB and/or PINK nor stocks of U.S. companies which are executed on a non-U.S. exchange.

 

Example: Assume hypothetical stock XYZ closed yesterday at $10.00 and today reports a trade at $8.99 (down 10.1%) with a NBBO of $8.98 x $9.00. As the stock has declined by greater than 10%, the primary listing market would trigger the circuit breaker, effectively prohibiting the display or execution of a short sale order at $8.98 or less even if the order was a market order or had a limit price below $8.98.  The short sale order may only be displayed or executed at $8.99 or higher (assuming the stock trades in one penny increments). A long sale order could only be displayed or executed at $8.98 or higher. This Price Restriction would remain in effect for the remainder of today and tomorrow (assuming no subsequent price declines of 10% or more).

Special risks of Exchange For Physical (EFP) products

Übersicht: 

The following article discusses the special risks associated with hedged financing transactions which employ the traditional OneChicago single stock future contract (designated by product symbol suffix of "1C") which is eligible for adjustment on special dividends or distributions but not adjusted for ordinary dividendsThe particular risk described below can be avoided through use of the Exchange's dividend protected or NoDiv product (designated by product symbol suffix of "1D") which are adjusted to remove the impact of all dividends.

Discussion:

Account holders transacting in EFPs, including Low Synthetic Yield positions using the OneChicago traditional single stock future ("1C" product) are advised to pay particular attention to the risks inherent in such positions, the effect of which may be to significantly alter the cost of the position.  These risks generally originate from corporate actions, specifically those involving a distribution to the holder of record for the stock with no corresponding adjustment made to the futures contract deliverable.

 
As background, a Low Synthetic Yield position, or EFP purchase, consists of a long single stock future coupled with a short underlying stock position. Traders maintaining this type of position are typically seeking to avail themselves of market implied borrowing rates which are more advantageous than those quoted by carrying brokers (i.e., the stock is sold and bought forward at a net carrying cost which is lower than that of the available lending rate). In certain instances, however, the single stock future may be trading at parity or even at a discount to the stock price, seemingly implying a no-cost loan of the short sale proceeds and/or a locked-in profit from selling the stock at a higher price today than that which one will be obligated to deliver at in the future. 
 
Take, for example, the ING Group N.V. (ADR) EFP.  On October 29, 2009, the stock was quoted at $13.29 and the Dec '09 future at $12.50, an implied annualized discount of approximately 43%. While the ability to sell the stock then at $13.29 and buy it back at a 51 day forward price of $12.50 appeared to guarantee a locked in profit of $0.79 per share (excluding commissions and any carrying costs), traders would also have had to take into account the likely impact of the firm's announcement three days prior of a restructuring plan which included the issuance of rights providing for repayment of a capital injection made by the Dutch State.  Under the terms of this plan, announced to the public on November 18th following European Commission approval, shareholders of record as of November 27th were to receive a distribution of non-transferable rights on November 30th.  
 
Also critical to the risk of this position was the determination announced by OCC's Securities Committee on November 23rd that no adjustment would be made to the futures contract.  As a result, traders maintaining a Low Synthetic Yield position comprised of the long future and short stock held through the ex-date of November 24th, were obligated to deliver the rights on November 30th (then priced at approximately $3.32 per share) to the stock lender with no offsetting adjustment made to the long future.  The effect of this corporate action upon traders initiating a single EFP position at the October 29th prices quoted above and exiting all positions at the November 30th closing prices would not have been to realize a gain, but rather sustain a loss (excluding commissions and any carrying costs) of approximately $254.00.  A summary of this transaction is provided below.
 
Product/Action
Cash
Stock
-Sell 100 @ $13.29 on 10/29/09
-Buy 100 @ $9.50 on 11/30/09
Net
 
 $1,329 
 (950)
$379 
Future
- Buy 1 contract @ $12.50 on 10/29/09
- Sell 1 contract @ $9.49 on 11/30/09
Net Variation
 
 
 
 
 
($301)
Right
-Buy 100 @ $3.32 on 11/30/09
 
($332)
Totals
($254)
 
 

 

Why does the "price" on hard to borrow stocks not agree to the closing price of the stock?

In determining the cash deposit required to collateralize a stock borrow position, the general industry convention is for the lender to require a deposit equal to 102% of the prior business day's settlement price, rounded up to the nearest whole dollar and then multiplied by the number of shares borrowed.  As borrow rates are determined based upon the value of the loan collateral, this convention impacts the cost of maintaining the short position, with the impact being most significant in the case of low-priced and hard-to-borrow shares. Note, for shares not denominated in USD the calculation will differ. Find below a table summarizing the calculations per currency:

Currency Calculation Method
USD 102%; rounded up to the nearest dollar
CAD 102%; rounded up to the nearest half dollar
EUR 105%; rounded up to the nearest cent
CHF 105%; rounded up to the nearest rappen
GBP 105%; rounded up to the nearest pence

 

Account holders may view this adjusted price for a given transaction in the "Non-Direct Hard to Borrow Details"  section of the daily account statement.  Two examples of this collateral calculation and its impact upon borrow fees are provided below.

 

Example 1

Sell short 100,000 shares of ABC at a price of $1.50

Short sale proceeds received = $150,000.00

Assume the price of ABC falls to $0.25 and the stock has a borrow fee rate of 50%

 

Short stock collateral value calculation

Price = 0.25 x 102% = 0.255; round up to $1.00

Value = 100,000 shares x $1.00 = $100,000.00

Borrow fee = $100,000 x 50% / 360 days in year = $138.89 per day

Assuming the account holder's cash balance does not include proceeds from any other short sale transaction then this borrow fee will not be offset by any credit interest on the short sale proceeds as the balance does not exceed the minimum $100,000 Tier 1 threshold necessary to accrue interest.

 

Example 2 (EUR denominated stock)

Sell short 100,000 shares of ABC at a price of EUR 1.50

Assume a prior business day's close price of EUR 1.55 and a borrow fee rate of 50%

Short stock collateral value calculation

Price = EUR 1.55 x 105% = 1.6275; round up to EUR 1.63

Value = 100,000 shares x 1.63 = $163,000.00

Borrow fee = EUR 163,000 x 50% / 360 days in year = EUR 226.38 per day

 

Syndicate content