## How do you calculate margin requirements on futures and futures options?

Overview:

Futures options, as well as futures margins, are governed by the exchange through a calculation algorithm known as SPAN margining.  For information on SPAN and how it works, please research the exchange web site for the CME Group, www.cmegroup.com.  From their web site you can run a search for SPAN, which will take you to a wealth of information on the subject and how it works.  The Standard Portfolio Analysis of Risk system is a highly sophisticated methodology that calculates performance bond requirements by analyzing the “what-ifs” of virtually any market scenario.

Background:

In general, this is how SPAN works:

SPAN evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of derivative and physical instruments might reasonably incur over a specified time period (typically one trading day.) This is done by computing the gains and losses that the portfolio would incur under different market conditions.  At the core of the methodology is the SPAN risk array, a set of numeric values that indicate how a particular contract will gain or lose value under various conditions. Each condition is called a risk scenario. The numeric value for each risk scenario represents the gain or loss that that particular contract will experience for a particular combination of price (or underlying price) change, volatility change, and decrease in time to expiration.

The SPAN margin files are sent to IB at specific intervals throughout the day by the exchange, and are plugged into a SPAN margin calculator.  All futures options will continue to be calculated as having risk until they are expired out of the account, or are closed.  The fact that they might be out-of-the-money does not matter.  All scenarios must take into account what could happen in extreme market volatility, and as such the margin impact of these futures options will be considered until the option position ceases to exist.  The SPAN margin requirements are compared against IB's pre-defined extreme market move scenarios and the greater of the two are utilized as margin requirement.

## When I sell stock, how much does it increase SMA?

Overview:

When an account holder sells a marginable security, it will typically increase their SMA by 50% of the value of the security sold.

## Is there a way in TWS that I can prevent myself from making trades that cause my cash balance to go negative?

Overview:

There isn’t a function in TWS that prevents account holders with margin accounts from making trades that cause their cash balance to become negative, which would then incur interest charges for a margin loan.  Traders would want to ensure that their cash balance always remained positive, or open a cash account.  Negative cash balances are disallowed in cash accounts, and orders that would cause the cash balance to go negative should be rejected by the system.

## Why did I received a notice that the financial capacity in my account is less than 5% above the current margin requirement when my stock positions are fully-paid?

Overview:

IB will issue a warning message to any margin account approaching a maintenance margin deficiency (and therefore potential forced liquidation of positions).  This message is generated when the Equity With Loan Value (ELV for a stock account = Cash + Stock + Bond + Mutual Fund + Non-US Options) is less than or equal to the Maintenance Margin Requirement * 105%.  The warning message reads as follows:

ALERT: the financial capacity in this account is less than 5% above the current margin requirement.  To avoid a possible liquidation, please monitor the account to ensure that there is positive excess liquidity.

An account which hold stock positions that are full-paid (i.e. no cash debit) remains susceptible to liquidation if the account falls into deficit and the loan value of the stock is insufficient to cover the debit.  This is often the case, for example, when a margin account holds positions subject to 100% margin and a cash balance of \$0.  In the event the account is assessed a fee, such as commission, monthly minimum activity or market data subscription, a negative cash balance would results and IB would not be able to extend loan value against these securities to support the debit balance. The account would therefore be subject to a liquidation in an amount sufficient to cover any cash deficit.

Accordingly, the recipient of this warning message may wish to maintain a cash balance in an amount sufficient to cover any potential charges to the account and to avoid a forced liquidation.

## What happens if I’m assigned stock at expiration, and my account doesn’t have the funds necessary to satisfy the margin requirement?

Overview:

If an expired USD option position results in an automatic exercise (the Options Clearing Corporation will automatically exercise any stock option which expired 0.01 or more in-the-money), and the resulting stock position causes a margin deficit in your account, the account would become subject to immediate liquidation.  Given that the OCC processes the exercise and assignment after the expiration Friday close, liquidations in USD equities usually occur shortly after the open of regular trading hours (09:30 EST) on Monday or the next trading day.  Please be aware that any positions could be liquidated as a result of the account being in margin violation—the liquidation is not confined to only the shares that resulted from the option position.  For example, if the account holds currency, futures, future options positions, or any non-USD positions, such products may begin trading prior to Monday morning and, as such, liquidation of any of these positions could occur in order to meet the margin deficit which resulted from an options exercise.

Background:

Account holders should refer to the Characteristics and Risks of Standardized Options disclosure document which is provided by IB to every option eligible customer at the point of application and which clearly spells out the risks of assignment.  This document is also available online at OCC's web site.

## What happens to the USD equity option that I am long at expiration?

Overview:

There are two scenarios which could occur if a long option is taken to expiration.  If the option is out-of-the-money at expiration and you do not choose to exercise it, the option will expire worthless, and your losses will consist of the premium that was paid to acquire the option.  If the option is in-the-money at expiration by 0.01 or more, it will be automatically exercised on your behalf (unless you previously chose to lapse the option) by the Options Clearing Corporation (OCC).  The OCC processes monthly expiration options on the third Saturday of the month, or the day after Friday expiration.  The resulting long or short position will be put into the account, effective on the Friday trade date.  If the account has sufficient margin to satisfy the requirement on the resulting position, it will then be up to the account holder to decide what they want to do with the position.  If the resulting position causes a margin deficit, the account will be subject to liquidation at a time which is defined by the holdings within the account.  Please be aware that any positions could be liquidated as a result of the account being in margin violation—the liquidation is not confined to only the shares that resulted from the option position.  For example, if the account holds currency, futures, future options positions or and non-USD product, the account may begin to liquidate to meet the margin deficit as soon as a corresponding market opens.

Background:

Account holders should refer to the Characteristics and Risks of Standardized Options disclosure document which is provided by IB to every option eligible customer at the point of application and which clearly spells out the risks of assignment.  This document is also available online at OCC's web site.

## Why was I liquidated?

Overview:

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.

Background:

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.

## What is the exchange minimum margin requirement on SSF positions?

Overview:

In the case of a long or short SSF, the exchange margin margin requirement is equal 20% of the underlying value of the contract (initial and maintenance margin)

In the case of a hedged position (e.g., High or Low Synthetic startegy) in which a customer is long (short) a security futures contract and short (long) the underlying security, the required maintenance margin would be equal to 5% of the instrument having the higher current market value.

## Can I convert a long cash balance to a non-base currency or trade a position denominated in a non-base currency in my cash account?

Overview:

Yes, albeit, with certain limitations.  IB provides cash accounts the ability to trade products denominated in a currency other than the designated base currency of the account as long as the account is classified as a multi-currency cash account (i.e., maintains Forex trading permissions).  To trade a security denominated in a non-base currency, the account holder must either first deposit the appropriate currency into their account or perform a currency conversion via the IdealPro venue.  Regardless of the method selected, one needs to ensure that a sufficient balance of the appropriate currency exists in order to cover the purchase price of the applicable security including commissions prior to submitting the order or it will be rejected. This implies that IdealPro currency conversions must settle prior to the converted funds being available for a subsequent transaction (e.g., if you are converting USD into EUR for the purpose of purchasing a EUR denominated stock, you would not be able to enter the stock order until the conversion trade had settled two business days later).

Individuals trading futures in a cash account should note that futures variation is settled in cash and any variation which serves to generate a cash deficit in any given currency type (i.e. variation exceeds available cash margin) will result in a forced position liquidation in an amount sufficient to eliminate the cash deficit.

Finally, note that cash accounts are restricted from holding a short balance in any non-base currency as this would constitute a margin loan.  In addition, clients of IB India are not allowed to maintain a multi-currency cash account and may only maintain assets which are denominated in INR.

## What happens if the net liquidating equity in my Portfolio Margining account falls below USD 100,000?

Overview:

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."

IMPORTANT NOTICE

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.