IB Index CFDs - Facts and Q&A

Background: 

The following article is intended to provide a general introduction to index-based Contracts for Differences (CFDs) issued by IB.

For information on IB Share CFDs, please click here.


   

Introduction

IB Index CFDs are contracts which deliver the return of a market index. Said differently, the CFD is an agreement between the buyer (you) and IB to exchange the difference between the current value of an index, and its value at a future time. If you hold a long position and the difference is  positive, IB pays you. If it is negative, you pay IB. The CFD contract is marked to market daily with gains/losses settled into your account in cash in the form of variation margin.

IB Index CFDs are traded through your margin account, and you can therefore enter long as well as short leveraged positions. Minimum margin is 5%.

The price of the Index CFD is directly related to the price of the exchange-quoted related future. The price-movement of the Index CFD tracks the movement of the related future, although the price levels differ by an adjustment for interest and dividends (fair-value adjustment).

For example (actual quotes):

Low Commissions and Financing Rates: Unlike other Index CFD providers IB charges a transparent commission, rather than widening the spread of the related future. Depending on the index, commission rates are only 0.005% - 0.01%. Overnight financing rates are just benchmark +/- 1.5%.
 
Transparent Quotes: Because IB does not widen the spread, the Index CFD quotes accurately  represent the spreads and price movements of the related future, and there are no re-quotes. What you see is what you get.
 
Flexible Exposure to Major Markets: IB Index CFDs are available for the main US, European and Asia Pacific indices. They can be traded in lots as small as 1X the index level, a fraction of the size of the related futures. And unlike the related futures, they do not need to be rolled over. You can trade all European and US IB Index CFDs from 09:00 - 22:00 CET.
 
Margin Efficiency: IB Index CFDs are margined at the same low rates as the related future, adjusted for contract size (subject to a minimum of 5%).

 

Specifications:

Underlying: Synthetic index based on fair-value adjusted near-month future.

IB Index CFDs track the related future, adjusted for fair value. The synthetic index level is very close to the cash index, but may differ somewhat as explained below.

In the futures market fair value is the equilibrium price for a futures contract. It is the price at which an investor effectively pays the appropriate rate of interest, and is compensated for the dividends he forgoes by holding the future rather than the underlying shares.

The fair value is determined by adjusting the cash index as follows, taking into account the time remaining to expiry:

Cash Index Value + Interest - Dividends = Future at Fair Value

To determine the value of the IB Index CFD, we reverse the process:

Actual Futures Price - Interest + Dividends = IB Index CFD Value

The result is not necessarily the same value as the cash index. This is because the starting point is the actual price of the future, and the future may trade above or below its fair value.

Having established the level for the synthetic index, the actual CFD quotes show spreads and ticks that reflect those of the underlying future. IB charges a commission rather than widening the spread, enabling a transparent comparison between the returns of the Index CFD and the related future.

Contract Size: 1X index level.
 
Contract Type: Open-end (no rolls).
 
Quotes: Quotes track the related future, adjusted for fair value. Quotes refresh 2X/second (the related future may refresh more often in volatile markets, so some tracking error is possible). No re-quotes. Trades honored within tolerances but fills not guaranteed in extreme market moves.
 
Spreads: Same as for the related future. IB earns a commission, i.e. does not make money by widening the spread
 
Tick Size: Same as related future
 
Commission: Calculated in basis points (0.5 – 1 bps, see table at the beginning of this article for details by index)
 
Financing: Index CFD interest is charged at a uniform rate of BM +/- 1.5% regardless of balance. Index CFD balances are not included in the determination of the applicable scaled rate for Share CFDs.
 
Dividend Adjustment: Based on ordinary dividends for the constituents of each index. Dividends are accrued on the ex-date and settled T + 3.
 
Corporate Action Adjustments: None for the CFD. Corporate actions are reflected in the index level
 
P&L: Credited/Debited daily (as for share CFDs)
 
Margin: Same as the margin for the related future, adjusted for size (subject to a 5% minimum)
 
Trading Hours: European and US IB Index CFDs 09:00 - 22:00 CET. Asian IB Index CFDs Regular Exchange Hours.
 
Shortable: Yes
 
Short Fees: None
 
Order Types: MKT, LMT, STP, STP LMT, MIT, LIT, TRAIL, TRAIL LMT, etc
 
Trading Permissions: Same as for Share CFDs
 
Market Data Permissions: Index CFD market data is free, but permission is required for system reasons

 

Frequently asked Questions

What Indices are available as CFDs?

The principal indices in the United States, Europe and Asia Pacific. Please see CFD Product Listings for more detail.

Do you have CFDs on commodities?

IB does not currently offer Commodity CFDs.

How do you determine your Index CFD quotes?

IB Index CFDs track the related future, adjusted for fair value. It is in effect a synthetic index level that is very close to the cash index, but may differ somewhat as explained below.

In the futures market fair value is the equilibrium price for a futures contract. It is the price at which an investor effectively pays the appropriate rate of interest, and is compensated for the dividends he forgoes by holding the future rather than the underlying shares.

The fair value is determined by adjusting the cash index as follows, taking into account the time remaining to expiry:

Cash Index Value + Interest - Dividends = Future at Fair Value

To determine the value of the IB Index CFD, we reverse the process:

Actual Futures Price - Interest + Dividends = IB Index CFD Value

The result is not necessarily the same value as the cash index. This is because the starting point is the actual price of the future, and the future may trade above or below its fair value.

Having established the level for the synthetic index, the actual CFD quotes show spreads and ticks that reflect those of the underlying future. IB charges a commission rather than widening the spread, enabling a transparent comparison between the returns of the Index CFD and the related future.

How do you determine margins for Index CFDs?

The margins are the same as for the related future, adjusted for size. Please refer to CFD Margin Requirements for more detail.

Are short Index CFDs subject to forced buy-in?

No. As the reference instrument is a future, the index CFD is not affected by stock loan availability.

How do you handle dividends and corporate actions?

The index level itself is adjusted for corporate actions, and no direct adjustments to the CFD are
necessary. Index CFDs are however adjusted for dividends as the underlying future is typically based on a price index. The only exception among the currently available IB Index CFDs is Germany 30 (IBDE30), which is based on a total return index.

For an overview please see CFD Corporate Actions.

Can anyone trade IB CFDs?

All clients can trade IB CFDs, except residents of the USA, Canada, Hong Kong and Australia. There are no exemptions based on investor type to the residency based exclusions. More details are available in CFD Trading Access.

What do I need to do to start trading CFDs with IB?

You need to set up trading permission for CFDs in Account Management, and agree to the relevant trading disclosures. The trading permission covers both Index and Share CFDs. IB will then set up a new account segment (identified with your existing account number plus the suffix “F”). Once the set-up is confirmed you can begin to trade. You do not need to fund the F segment separately; funds will be automatically transferred to meet CFD margin requirements from your main account. For detailed instructions please see CFD Trading Access and How to Request Trading Permissions for IB CFDs (video).

Are there any market data requirements?

The market data for IB Index CFDs is free, but you need to subscribe to it for system reasons. It is a global permission (like FX), so you only need to subscribe once. To do this, log into account management, and click through the following tabs: Trade/Configuration/Market Data Subscriptions. Alternatively you can set up an Index CFD in your TWS quote monitor and click the “Market Data Subscription Manager” button that appears on the quote line.

How are my CFD trades and positions reflected in my statements?

Your CFD positions are held in a separate account segment identified by your primary account number with the suffix “F”. You can choose to view Activity Statements for the F-segment either separately or consolidated with your main account. You can make the choice in the statement window in Account Management.

Can I transfer in CFD positions from another broker?

IB does not currently have a facility for transferring Index CFD positions. IB will be glad to facilitate the transfer of Share CFD positions. As the transfer of CFD positions is more complex than is the case for share positions, we generally require the position to be at least the equivalent of USD 100,000.

What account protections apply when trading CFDs with IB?

CFDs are contracts with IB UK as your counterparty, and are not traded on a regulated exchange and are not cleared on a central clearinghouse. Since IB UK is the counterparty to your CFD trades, you are exposed to the financial and business risks, including credit risk, associated with dealing with IB UK. Please note however that all client funds are always fully  segregated, including for institutional clients. IB UK is a participant in the UK Financial Services Compensation Scheme ("FSCS"). IB UK is not a member of the U.S. Securities Investor Protection Corporation (“SIPC”). Please refer to the the IB UK CFD Risk Disclosure for further detail on risks associated with trading CFDs.

In what type of IB accounts can I trade CFDs e.g., Individual, Friends and Family,
Institutional, etc.?

All margin accounts are eligible for CFD trading. Cash or SIPP accounts are not.

What are the maximum positions I can have in a specific Index CFD?

There is no pre-set limit for position size, but please be aware that trade-size restrictions apply to Index CFDs. Please see the table at the beginning of this document for more detail.

Can I trade CFDs over the phone?

No. In exceptional cases we may agree to process closing orders over the phone, but never opening orders.

CFD Resources

Below are some useful links with more detailed information on IB’s CFD offering:

CFD Product Listings

CFD Commissions

CFD Financing Rates

CFD Margin Requirements

CFD Corporate Actions

CFD Trading Access

The following video tutorials are also available:

How to Place a CFD Trade on the Trader Workstation

How to Request Trading Permissions for IB CFDs

 

 

 

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