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 2,000 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.

Key Margin Definitions

Overview: 

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). 

 
 
Available Funds (ELV – Initial Margin) – equals Equity with Loan Value less the Initial Margin Requirement.
 
 
Excess Liquidity (ELV – Maintenance Margin) – equals Equity with Loan Value less the Maintenance Margin Requirement.
 
 
Initial Margin Requirement - The minimum portion of a new security purchase that an investor must pay for in cash. For U.S. stocks this is defined by Reg. T and is currently 50% (Reg. T Initial Margin). As IB calculates margin on a real-time basis and Reg. T is enforced at the end of the day, IB performs an initial margin requirement check at the point of trade, albeit at a rate generally less than 50% (IB Initial Margin). 
 
 
Maintenance Margin Requirement – the amount of equity which must be maintained in order to continue holding a position. In the U.S., the rules of the listing exchanges specify the maintenance margin requirements on security transactions subject to SEC approval.  The exchange maintenance margin requirement for long stock positions is currently set at 25% although brokers often establish 'house margin' requirements in excess of that, particularly where the security is considered low-priced or subject to volatile price changes.  The exchange maintenance margin requirement for short stock positions is currently set at 30%.
 
 
Net Liquidating Value (NLV) – for a securities account equals total cash value + stock value + securities options value + bond value + fund value. For a commodities account equals total cash value + commodities options value. 
 
Soft Edge Margin (SEM) – if during the trading day an account’s Equity with Loan Value is equal to at least 90% of the maintenance margin requirement, it will not be subject to liquidation until 15:45 ET for U.S. stocks (i.e., the earliest of: 15 minutes before market close, 15 minutes before end of liquidation hours or start of Reg. T enforcement time) at which time the maintenance margin requirement must be met. SEM start time for U.S. stocks is 09:30 ET and for other products the later of: the market open (latest open time if multiply listed); or start of liquidation hours.  

 

Buying Power - the maximum dollar value of securities that you can buy in your account without depositing additional equity.  For a cash account this is equal to the lesser of ELV or Previous Day ELV less the Initial Margin Requirement.  For a margin account this is equal to Available Funds * 4 (reciprocal of the 25% Maintenance Margin Rate)
 
Special Memorandum Account (SMA) – 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.  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.

 

Securities Gross Position Value (GPV) – Absolute value of Long Stock Value + Short Stock Value + Long Option Value + Short Option Value + Long SSF Notional Value + Short SSF Notional Value + Fund Value.

 

Currency Conversion for Trading Products in a Non-Base Currency

How to convert a currency if you wish to trade products in a currency other than the currency your account was initially funded in

For additional information on currency conversions please refer to the Knowledge base articles:

Why Are There Two Currencies Shown When Trading Forex and How Do They Work?

What Happens if I Trade a Product Denominated in a Currency Which I Do Not Hold in My Account?

 

 

Margin oversight for U.S. listed securities & commodities products

The particular regulation which determines the minimum amount of margin collateral that each broker is required to collect from clients transacting in U.S. exchange listed products generally depends upon the following 3 factors:

1. Product Classification - the principal determinant of regulatory oversight is based upon whether the product is classified as a security or commodity. Security products, including stocks, bonds, options and mutual funds are regulated by the Securities and Exchange Commission (SEC).  Commodity products, which include futures contracts and options on futures contracts, are regulated by the Commodities Futures Trading Commission (CFTC).  Single stock futures, a special class of futures contracts, are considered a hybrid product subject to joint regulation by the SEC and CFTC.

In the case of security products, the US central bank referred to as the Federal Reserve (FRB) holds responsibility for regulating the extension of credit by brokers and dealers.  This is accomplished through Regulation T, or Reg T as it is commonly referred, which provides for establishment of a margin account and which imposes the initial margin requirement and payment rules on certain securities transactions.  For example, on stock purchases, Reg T currently requires an initial margin deposit by the client equal to of 50% of the purchase value, allowing the broker to extend credit or finance the remaining 50%.  Reg T does not establish margin requirements for securities options which fall under the jurisdiction of exchange rules (subject to SEC approval).  In addition, the FRB has excluded from Reg T the authority to establish either initial or maintenance margin requirements on securities positions held in a portfolio margining account.  here margin authority resides with the security exchanges whose rules are subject to SEC approval. 

The authority for establishing margin rates on commodity products resides with the listing exchanges, with the exception of broad based stock index futures, for which the FRB has delegated authority to the CFTC.

In the case of single stock futures, margin is set by the listing exchange and subject to SEC approval to the extent the position is carried in a securities account, and subject to an agreement that the margin be equivalent whether held in a securities or commodities account.  Margin for single stock futures are currently set at 20% of the underlying stock value.

2. Initial or Maintenance - initial margin generally refers to the amount of money or its equivalent that the customer must deposit in order to initiate the position and maintenance margin the amount of equity which must be maintained in order to continue holding the position. As noted above, Reg T controls the initial margin requirement on securities transactions.  The rules of the listing exchanges specify the maintenance margin requirements on security transactions subject to SEC approval.  The maintenance margin requirement for long stock positions is currently set at 25% although brokers often establish 'house margin' requirements in excess of that, particularly where the security is considered low-priced or subject to volatile price changes.

Commodities exchanges establish both the initial and maintenance margin requirements for products which they list (subject to provisions for broad based index futures and single stock futures as noted above).

3. Listing Exchange - as noted above, in the case of US securities products the listing exchange has the authority to establish rules for the maintenance margin requirement on positions held in a Reg T margin account and initial and maintenance margin (currently the same) for positions held in a portfolio margin account. Exchange margin rules, however, require prior SEC approval which acts to ensure that margin requirements are set  in a consistent manner across exchanges.  

Subject to the provisions noted above, commodities exchanges maintain authority to establish both initial and maintenance margin requirements.  As a general rule, US commodities exchanges employ the same risk-based margining methodology referred to as SPAN for determining the margin requirement on listed positions with each exchange specifying the relevant SPAN input factors (e.g., Price Scan Range, Volatility Scan Range, Spread Charges, Combined Commodity offsets).

Glossary terms: 

Margin Requirement on Leveraged ETF Products

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.

Special risk relating to offsets between options and futures

Account holders hedging or offsetting the risk of futures contracts with option contracts are encouraged to pay particular attention to a potential scenario whereby a change in the underlying price may subject the account to a forced liquidation even if the account remains in margin compliance.  This scenario is driven by a fundamental difference in which gains and losses are recognized in futures contracts vs. options contracts coupled with IB's requirement that the commodity segment of one's account maintain a positive cash balance at all times. 

Gains and losses in a futures contract, by design, are settled in cash and IB updates the account holder's cash balance through the TWS on a real-time basis for any changes in the futures contract price.  An option contract is also marked-to-the-market on a real-time basis but this change in value represents an unrealized (i.e., non-cash) profit or loss with the actual cash proceeds not reflected in the account until such time the contract is either sold, exercised or expires.

To illustrate this scenario, assume, for example, at time 'X' a hypothetical portfolio consisting of a credit cash balance of $6,850, 2 short Sep ES futures contracts, 2 Long Sep ES $1,000 strike call options on the futures contract marked at $31.50 each, with the cash index at $1,006.  Also assume that at time 'X+1' the cash index increases by 100 points or approximately 10%.  A snapshot of the account equity and margin balances for each date is reflected in the table below.

Portfolio Time 'X' Time 'X+1' Change
Cash $6,850 ($3,150) ($10,000)
2 Long Sep ES $1,000 Calls* $3,150 $10,300 $7,150
2 Short Sep ES Futures* - - -
Total Equity $10,000 $7,150 ($2,850)
Margin Requirement $2,712 $666 ($2,046)
Margin Excess $7,288 $6,484 ($804)

*Note: the contract multiplier for the ES future and option is 50.

As reflected in the table above, the projected effect of this market move would be to decrease the cash balance to a deficit level based upon the mark-to-market or variation on the futures contracts of $10,000 (100 * 50 * 2). While the effect of this upon equity would be largely offset by a $7,150 increase in the market value of the long calls, the unrealized gain on the options has no effect upon cash until such time they are either sold, exercised or expire.  In this instance, IB would act to liquidate positions in an amount sufficient to eliminate the cash deficit while maintaining margin compliance and attempting to preserve the greatest level of account equity.

While hypothetical in nature, this sample portfolio is intended to be illustrative of the liquidity risk associated with any portfolio containing futures and long options where the funding of any variation on the futures position must be supported by available cash or buying power from the securities segment of the account and not unrealized option gains.

Mutual Offset System

A special arrangement between CME Group and the Singapore Exchange (SGX), referred to as the Mutual Offset System (MOS), allows traders of both the Yen and USD denominated Nikkei 225 futures to take positions in the products at one exchange and offset them at the other one.  The effect of this arrangement is to create one marketplace crossing different time zones as well as fungibility of contracts between the exchanges.

IB account holders may avail themselves of the MOS functionality by specifying at the point of trade entry both the proper underlying symbol and exchange.  In the case of the Yen Denominated Nikkei 225 Index contract the IB underlying symbol is 'NIY' and the exchange either 'Globex' (for contracts listed at and trading during CME hours) or 'SGXCME' (for contracts listed at and trading during SGX hours).  In the case of the USD Denominated Nikkei 225 Index contract the IB underlying symbol is 'NKD' and the exchange either 'Globex' (for contracts listed at the CME) or 'SGXCME' (for contracts listed at the SGX).

To illustrate the concept of fungibility, were an account holder to enter into a long futures position on the CME exchange and thereafter enter into a short futures position having the same underlying symbol and expiration date but listed on the SGXCME exchange, the effect would be the same as if that short position was executed on the CME exchange and that is to close the long position. 

MOS also provides margin offset for positions entered into on either of the two exchanges in the manner noted above.  Here, for example, a long futures position entered into from the CME exchange would be afforded spread margin treatment against a short position having the same underlying but a different expiration month which was entered into from the the SGXCME exchange. This effect is intended to be similar to that which would take place if both the long and short position were entered into from the same exchange.

IMPORTANT NOTE

IB also offers trading in the identical SGX-listed futures contracts but without the MOS features of fungibility and margin offset as outlined above. In the case of the Yen Denominated Nikkei 225 Index, the contract having the underlying symbol 'SGXNK' and exchange of SGX is the functional equivalent of the 'NIY' contract having the exchange of SGXCME.  Similarly, in the case of the USD Denominated Nikkei 225 Index, the contract having the underlying symbol 'N225U' and exchange of SGX is the functional equivalent of the 'NKD' contract having the exchange of SGXCME. It should be noted, however, that a long (short) position of a given expiration entered into on SGX exchange will not close out a short (long) position entered into on the SGXCME, or the CME for that matter.  In addition, there is no margin offset provided between SGX-listed and SGXCME or CME contracts.

A table of trading hours for the MOS eligible products is provided below:

Symbol Description Exchange Trading Hours (ET)*
NIY Yen Denominated Nikkei 225 Index Globex

Mon-Fri 16:30 - 16:15 the next day (closing at 15:15 Friday);

Daily maintenance shutdown 17:30 - 18:00

NIY Yen Denominated Nikkei 225 Index SGXCME Mon - Fri 18:30 - 01:30
NKD USD Denominated Nikkei 225 Index Globex Mon-Fri 03:00 - 16:15; 16:30 - 17:30 & 18:00 - 19:00
NKD USD Denominated Nikkei 225 Index SGXCME  Mon - Fri 02:15 - 09:55 & 18:30 - 01:30

 *Please refer to the respective websites of each exchange for adjustments which take place during periods when US Daylight Savings Time is in effect.

Currency Margin Calculation (Withdrawals)

Overview: 

The following provides an example of how currency margins are calculated when determining the funds available for withdrawal.

Margin for Withdrawal Example

In the following example, assume the base currency for the account is USD and the net asset value positions (the sum of the values of all stock, cash, option, etc positions in each currency) are as follows:

  • USD 50,000
  • EUR 30,000
  • CHF -39,000
  • MXN -100,000
  1. Determine the net asset value (net liquidation value) for each currency. In this example, this is shown in columns 1 and 2 of the example table.
  2. Convert all non-base currency positions to base currency using prevailing market rates between the asset currency and base currency, here, USD. (column 3). This result is shown in column 4.
  3. Apply the margin rate for each currency (column 5).
  4. Calculate the margin in base currency as the net asset value from each original currency converted to USD multiplied by the margin for that currency (column 4 times column 5). The result is shown in column 6.
  5. The total margin requirement is the sum of each currency sourced margin requirement. In our example, the total margin requirement in base currency, USD, is $2,126. As the total net liquidating value expressed in USD is $46,476, the available funds is the difference, $44,350.

 

1
2
3
4
5
6
Currency
Net Asset Value (local currency)
Currency Rate
Net Asset Value
(converted to base currency, USD)
Margin Rate
Margin Requirement
(in base currency, USD)
USD 50,000 1.0000 USD/USD 50,000 0% 0.00
EUR 30,000 1.2000 USD/EUR 36,000 2.5% 900
CHF -39,000 1.3000 CHF/USD -30,000 2.5% 750
MXN -100,000 10.500 MXN/USD -9,524 5% 476
TOTAL     US $ 46,476   US $2,126
Available Funds     US $ 44,350    

Currency Margin Calculation

Overview: 

The following provides an example of how currency margins are calculated.

 

Margin for Trading Example


Assume base currency is USD for the  below example


1.  Determine the base-currency equivalent of net liq values in the account


            NetLiq    USD Equivalent

EUR:     -14,362.69     -19,712.723

KRW:   6,692,613.37        5032.04

USD:      15,073.07      15,073.07


Using exchange rates as follows

EUR USD 0.72860

KRW USD 1330.00000


 

2.  Determine the haircut rates for each currency pair


HairCut Rates

USD             EUR             .025

USD             KRW             .10

EUR             KRW             .10


 

3.  Determine the largest negative currency balance

4.  Sort the haircut rates from smallest to largest


EUR USD  0.025

EUR KRW  0.10


5.  Starting with the positive net liq base-currency equivalent with the lowest haircut rate, calculate the margin requirement on that portion which may be used to off-set the negative net liq value


Consume 15,073.07 USD equivalent against the EUR

Margin1 = (15,073.07) x 0.025 = 376.82


6.  Repeat step (5) until all negative net liq values have been covered


Remaining negative net liq

-19,712.723 + 15,073.07 = -4,639.65

Consume remaining negative net liq with 4,639.65 USD equivalent of KRW

Margin2 = (4,639.65) x 0.10 = 463.97

Remaining negative net liq

-4,639.65 + 4,639.65 = 0.00


Total margin requirement = Margin1 + Margin2 = 376.82 + 463.97 = 840.79

Availability of proceeds in a 'Cash' type account

Accounts which have been set up as a 'Cash' type do not have access to the proceeds from the sale of securities until such time the transaction has settled at the clearinghouse and proceeds have been issued to IB.  Securities settlement generally takes place on the third business day following the sale transaction.  Providing access to the funds prior to settlement would constitute a loan, a transaction which is precluded from taking place within this account type. 

The one exception is under the Free-Riding rule. Clients with a cash account can use the proceeds from the sale of a security to purchase a different security under the condition that the second security is held until settlement of the initial sale. If the client sells the second security prior to settlement of the initial trade, they will be in violation of the Free-Riding rule and will be locked for 90 days from utilizing this exception.

Account holders who wish to have access to settled funds prior to the settlement day may do so by electing an account type of 'Margin'.  Under this account type unsettled funds may be used for trading purposes but may not be withdrawn until settlement.  Account holders maintaining a 'Cash' account may request an upgrade to a 'Margin' type account by logging into Account Management and selecting the Trading Access and then Trading Configuration menu options.  Upgrade requests are subject to a compliance review to ensure that the account holder maintains the appropriate qualifications.

 

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