How Interest is Calculated
How are interest credits and debits determined?
The net interest credit or debit, if any, for your account is accrued daily and posted monthly using the following three steps:
- Organize Cash Balance by Group and Currency: for each currency type, a long or short cash balance is determined for each of: a) the commodity sub-account; b) the security sub-account less the market value of any short stock positions; and c) the balance of any short stock positions. Balances are partitioned in this manner as security and commodity balances are subject to distinct segregation pools and investment guidelines. Cash balances associated with stock sales, while maintained in the securities sub-account, are pledged as collateral to secure the stock borrow position and are therefore associated with unique returns.
- Determine the Benchmark Rate: for each currency type, an internationally recognized benchmark for overnight deposits is used as a basis for determining the rates at which we pay and charge interest. Long balances are paid interest at the Benchmark Rate less a % spread and short balances charged interest at the Benchmark Rate plus a % spread.
- Apply Rate by Balance Tier: the % spread from the Benchmark Rate is then applied on a tier basis such that larger cash balances generally receive an increasingly (higher credit/lower debit) effective rate
For additional information regarding interest calculations including current Benchmark Rates, click here.
EXAMPLES:
1. An account maintaining a net cash credit balance of USD 12,000 with a credit of USD 6,000 in each of the security sub-account (less the market value of any short stock positions) and the commodity sub-account, would earn no interest as each group holds a balance of less than the USD 10,000 Tier I level above which interest is earned.
2. An account maintaining a net cash credit balance equivalent to USD 12,000 comprised of a long USD balance of 6,000 and a long EUR balance equivalent to USD 6,000 would earn no interest as each currency group holds a balance of less than the USD 10,000 Tier I level above which interest is earned.
Similarly, an account maintaining a net cash credit balance of USD 12,000 with USD debit of 6,000 in the security sub-account (less the market value of any short stock positions) and a short stock market value credit of USD 18,000 would be charged interest on the Tier 1 debit of USD 6,000 and would earn no interest on the short stock credit as it falls below the USD 100,000 Tier I level.
3. An account maintaining a net cash credit balance equivalent to USD 5,000 comprised of a long USD balance of 8,000 and a short EUR balance equivalent to USD 3,000 would be subject to an interest debit based upon the short EUR balance. There would be no offsetting credit on the long USD balance as it is less than the USD 10,000 Tier I level above which interest is earned.
IMPORTANT NOTE:
While successively larger debit balances are generally afforded a more favorable (i.e., lower) borrowing rate, IB charges a higher default interest rate for large debit cash balances denoted as Tier IV as defined on the website.