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.

What positions are eligible for Portfolio Margining?

Overview: 

Portfolio Margining is eligible for US securities positions including stocks, ETFs, stock and index options and single stock futures.  It does not apply to US futures or futures options positions or non-US stocks, which may already be margined using an exchange approved risk based margining methodology.

Are there any qualification requirements in order to receive Portfolio Margining treatment on US securities positions and how does one request this form of margin?

Overview: 

In order to enabled for portfolio margining an account must be approved for option trading and must have at least USD 110,000 in net liquidating equity (USD 100,000 to maintain, once enabled). Account holders will also be required to acknowledge and sign the Portfolio Margin Risk Disclosure document and be bound by its terms.  

Portfolio margining may be requested through the on-line application phase (in the Account Configuration step)  or after the account has been approved. To apply once the account has already been approved, log into Account Management and select the Manage Account, Settings, Configure Account and then Account Type menu items. There you may choose the portfolio margin treatment which will initiate the approval process.  Please note that requests are subject  to review  (generally a 1-2 day process) and may be declined for  various reasons  including a  projected increase  in margin  upon upgrade  from Reg T to Portfolio Margining. 


What is SMA and how does it work?

Overview: 

SMA refers to the Special Memorandum Account, which 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. Its purpose is to preserve the buying power that unrealized gains provide towards subsequent purchases which, absent this handling, could be assured only by withdrawing excess equity and depositing it at the time the subsequent purchase is made. In that sense, SMA helps to maintain a stable account value and minimize unnecessary funding transactions.

While SMA increases as the value of a security goes up, it does not decrease if the security falls in value. SMA will only decrease when securities are purchased or cash withdrawn 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. Transactions which serve to increase SMA include cash deposits, interest income or dividends received (on a dollar for dollar basis) or security sales (50% of the net proceeds). It’s important to note that the SMA balance represents an aggregation of each historical bookkeeping entry impacting its level starting from the time the account was opened. Given the length of time and volume of entries this typically encompasses, reconciling the current level of SMA from daily activity statements, while feasible, is impractical. 

To illustrate how SMA operates, assume an account holder deposits $5,000 and purchases $10,000 of securities having a loan value of 50% (or margin requirement equal to 1 – loan value, or 50% as well). The before and after account values would appear as follows:

Line Item
Description
Event 1 - Initial Deposit
Event 2 - Stock Purchase
A.
Cash
$5,000
($5,000)
B.
Long Stock Market Value
$0
$10,000
C.
Net Liquidating Equity/EWL* (A + B)
$5,000
$5,000
D.
Initial Margin Requirement (B * 50%)
$0
$5,000
E
Available Funds (C - D)
$5,000
$0
F.
SMA
$5,000
$0
G.
Buying Power
$10,000
$0

Next, assume that the long stock increases in value to $12,000. This $2,000 increase in market value would create SMA of $1,000, which provides the account holder the ability to either: 1) buy additional securities valued at $2,000 without depositing up additional funds and assuming a 50% margin rate; or 2) withdraw $2,000 in cash, which may be financed by increasing the debit balance if the account holds no cash. See below:

Line Item
Description
Event 2 – Stock Purchase
Event 3 - Stock Increase
A.
Cash
($5,000)
($5,000)
B.
Long Stock Market Value
$10,000
$12,000
C.
Net Liquidating Equity/EWL* (A + B)
$5,000
$7,000
D.
Initial Margin Requirement (B * 50%)
$5,000
$6,000
E
Available Funds (C - D)
$0
$1,000
F.
SMA
$0
$1,000
G.
Buying Power
$0
$2,000

*EWL represents equity with loan value which, in this example, equals net liquidating equity.

Finally, note that SMA is a Reg. T concept used to evaluate whether securities accounts carried by IB LLC are in compliance with overnight initial margin requirements and it is not used to determine compliance with maintenance margin requirements on either an intraday or overnight basis. It is also not used to determine whether commodities accounts are margin compliant. Similarly, accounts which report negative SMA at the time each day when overnight, or Reg.T initial margin requirements go into effect (15:50 ET) are subject to position liquidations to ensure margin compliance.

 

 

Syndicate content