Excess Margin Securities

The term "excess margin securities" refers to margin securities carried for the account of a customer having a market value in excess of 140 percent of the total debit balance in the customer's account. These securities are in excess of the securities held in a customer's margin account that are pledged by the customer as collateral for the margin loan and can be used to support the purchase of additional securities on margin

Example:

A customer whose account equity consists solely of a cash balance of USD 10,000 on Day 1 purchases 400 shares of stock ABC at USD 50 per share on Day 2.

Account Balance Day 1 Day 2
Cash $10,000 ($10,000)
Stock $0 $20,000 
Total $10,000 $10,000 

On Day 2, the customer's excess margin securities total USD 6,000. This is calculated by subtracting 140% of the margin debit or loan balance from the market value of the stock position ($6,000 = $20,000 - {1.4 * $10,000}).

The term is relevant from a regulatory perspective as the SEC requires that U.S. broker dealers segregate and maintain in a good control location (e.g., DTC or bank) all customer securities which are deemed excess margin securities. Such securities cannot be pledged or loaned to finance the activities of the firm or other customers without specific written permission from the customer. The portion of the securities classified as margin securities ($20,000 - $6,000 or $14,000 in this example) are subject to a lien and may be pledged or loaned by the broker to others to assist in financing the loan made to the customer.

Note that securities which were excess margin at the date of acquisition may later be reclassified as margin securities based upon the customer's subsequent trade and/or margin borrowing activity. For example, if the loan value of excess margin securities is subsequently used to acquire additional securities on margin, a portion of securities will then be reclassified as margin securities and subject to a lien. If the customer subsequently deposits cash or sells securities to reduce or eliminate the margin loan, the securities will be reclassified as excess margin or fully paid and are required to be segregated.
See also "fully paid securities".

Fully Paid Securities

The term "fully paid securities" refers to securities held in a customer's margin or cash account that have been completely paid for and are not being pledged as collateral to support the purchase of other securities on margin. The term is relevant from a regulatory perspective as the SEC requires that U.S. broker dealers segregate and maintain in a good control location (e.g., DTC or bank) all customer securities which are fully paid.  Such securities cannot be pledged or loaned to finance the activities of the firm or other customers.

Note that securities which were fully paid at the date of acquisition may later be reclassified as margin or excess margin securities based upon the customer's subsequent trade and/or borrowing activity. For example, if the loan value of fully paid securities is subsequently used to acquire additional securities on credit, a portion of securities will then be classified as margin securities and subject to a lien and potential pledge or hypothecation by the broker.

See also "excess margin securities".

Overview of IB issued Share CFDs

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

For Information on IB Index CFDs please see IB Index CFDs - Facts and Q&A.

Topics covered are as follows:

I.    CFD Definition
II.   Comparison Between CFDs and Underlying Shares
III.  Cost and Margin Considerations
IV.  Worked Example
V.   CFD Resources
VI.  Frequently Asked Questions

 

 

I.  Share  CFD Definition

IB CFDs are OTC contracts which deliver the return of the underlying stock, including dividends and corporate actions (read more about CFD corporate actions).

Said differently, it is an agreement between the buyer (you) and IB to exchange the difference in the current value of a share, 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 Share CFDs are traded through your margin account, and you can therefore enter long as well as short leveraged positions. The price of the CFD is the exchange-quoted price of the underlying share. In fact, IB CFD quotes are identical to the Smart-routed quotes for shares that you can observe in the Trader Work Station and IB offers Direct Market Access (DMA). Similar to shares, your non-marketable (i.e., limit) orders have the underlying hedge directly represented on the deep book of those exchanges at which it trades.  This also means that you can place orders to buy the CFD at the underlying bid and sell at the offer.

To compare IB’s transparent CFD model to others available in the market please see our Overview of CFD Market Models.

IB currently offers approximately 3800 Share CFDs covering the principal markets in the US, Europe and Asia.  The constituents of the major indexes listed below are currently available as IB Share CFDs. In many countries IB also offers trading in liquid small cap shares. These are shares with free float adjusted market capitalization of at least USD 250 million and median daily trading value of at least USD 300 thousand.  Please see CFD Product Listings for more detail. More countries will be added in the near future.

United States S&P 500, DJA, Nasdaq 100, S&P 400 (Mid Cap), Non-Index Mid Cap
United Kingdom FTSE 350 + Liquid Small Cap (incl. IOB)
Germany Dax, MDax, TecDax + Liquid Small Cap
Switzerland Swiss portion of STOXX Europe 600 (48 shares)
France CAC Large Cap, CAC Mid Cap + Liquid Small Cap
Netherlands AEX, AMS Mid Cap + Liquid Small Cap
Belgium BEL 20, BEL Mid Cap + Liquid Small Cap
Spain IBEX 35
Portugal PSI 20
Sweden OMX Stockholm 30
Finland OMX Helsinki 25
Denmark OMX Copenhagen 30
Norway OBX
Czech PX
Japan Nikkei 225
Hong Kong HSI
Australia ASX 200
Singapore* STI

 *not available to Singapore residents

II.   Comparison Between CFDs and Underlying Shares

Depending on your trading objectives and trading style, CFDs offer a number of advantages compared to stocks, but also some disadvantages:
 
BENEFITS of IB CFDs
DRAWBACKS of IB CFDs
No stamp duty or financial transaction tax (UK, France, Belgium)
No ownership rights
Generally lower commission and margin rates than shares
Complex corporate actions may not always be exactly replicable
Tax treaty rates for dividends without need for reclaim
Taxation of gains may differ from shares (please consult your tax advisor)
Exemption from day trading rules
 

III.  Cost and Margin Considerations

IB CFDs can be an even more efficient way to trade the European stock markets than IB’s highly competitive stock offering.

Firstly, IB CFDs have low commissions compared to stocks, and the same low financing spreads:

 EUROPE
 
CFD
STOCK
Commission
GBP
0.05%
GBP 6.00 + 0.05%*
EUR
0.05%
0.10%
Financing**
Benchmark +/-
1.50%
1.50%

*per order + 0.05% of excess over GBP 50,000
**CFD financing on total position value, stock financing on borrowed amount

When you trade more, CFD commissions become even lower, as low as 0.02%. Financing rates are reduced for larger positions, to as low as 0.5%.  Please see CFD Commissions and CFD Financing Rates for more details.

Secondly, CFDs have lower margin requirements than stocks. This is because for CFDs we can apply a risk based margin rather than the regulatory formulas we must apply to stocks:

 
CFD
STOCK
 
All
Standard
Portfolio Margin
Margin Requirement*
10%
25% - 50%
15%

*Typical margin for blue-chips. Standard 25% intraday maintenance margin, 50% overnight.  Portfolio Margin shown is maintenance margin (incl. overnight). More volatile issues are subject to higher requirements

Please refer to CFD Margin Requirements for more detail.


IV.  Worked Example

Let’s look at an example. Unilever’s Amsterdam listing has returned 3.2% in the past month (20 trading days to May 14th, 2012) and you believe it will continue to perform well. You want to build a EUR 200,000 exposure and hold it for 5 days. You do 10 trades to build up and 10 trades to unwind. Your direct costs would be as follows:

 
CFD
STOCK
EUR 200,000 Position
 
Standard
Portfolio Margin
Margin Requirement
20,000
100,000
30,000
Commission (round trip)
200.00
400.00
400.00
Interest Expense
41.96
23.35
36.44
Total Direct Cost
241.96
423.55
436.44
Difference
 
75%
80%

Note: Interest expense for CFDs is calculated on the entire contract position, for shares interest is calculated on the borrowed amount. The applicable rates are the same for both shares and CFDs.

 

But let’s assume you only have EUR 20,000 available to fund the margin. If Royal Dutch Shell continues to perform as it has in the past month, your potential profit would compare as follows:  

OPPORTUNITY COST
CFD
STOCK
Available Margin
20,000
20,000
20,000
Total Invested
200,000
40,000
133,333
Return*
1,576.27
312.25
1,050.84
Difference
 
 -80%
 -33%

*past month's (to May 14th, 2012) average daily return over 5 days

 

Please keep in mind that leverage works both ways, and you can potentially lose more with CFDs than with higher margin stocks, including more than your initial investment.

 


V.   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


VI.  Frequently Asked Questions

What Stocks are available as CFDs?

Large and Mid-Cap stocks in the US, Western Europe, Nordic and Japan.  Liquid Small Cap stocks are also available in many markets. Please see CFD Product Listings for more detail. More countries will be added in the near future.

 

Do you have CFDs on Stock Indices?

Yes. Please see IB Index CFDs - Facts and Q&A.

 

How do you determine your Share CFD quotes?

IB CFD quotes are identical to the Smart routed quotes for the underlying share. IB does not widen the spread or hold positions against you. To learn more please go to Overview of CFD Market Models.

 

Can I see my limit orders reflected on the exchange?

Yes. IB offers Direct market Access (DMA) whereby your non-marketable (i.e., limit) orders have the underlying hedge directly represented on the deep book of those exchanges at which it trades. This also means that you can place orders to buy the CFD at the underlying bid and sell at the offer.

 

How do you determine margins for Share CFDs?

IB establishes risk-based margin requirements based on the historical volatility of each underlying share. The minimum margin is 10%. Most IB CFDs are margined at this rate, making CFDs more margin-efficient than trading the underlying share in most cases.  There are however no portfolio off-sets between individual CFD positions or between CFDs and exposures to the underlying share. Very large positions may be subject to additional margin. Please refer to CFD Margin Requirements for more detail.

 

Are short Share CFDs subject to forced buy-in?

Yes. In the event the underlying stock becomes difficult or impossible to borrow, the holder of the short CFD position will become subject to buy-in.

 

How do you handle dividends and corporate actions?

IB will generally reflect the economic effect of the corporate action for CFD holders as if they had been holding the underlying security*. Dividends are reflected as cash adjustments, while other actions may be reflected through either cash or position adjustments, or both. For example, where the corporate action results in a change of the number of shares (e.g. stock-split, reverse stock split), the number of CFDs will be adjusted accordingly. Where the action results in a new entity with listed shares, and IB decides to offer these as CFDs, then new long or short positions will be created in the appropriate amount. For an overview please CFD Corporate Actions.

*Please note that in some cases it may not be possible to accurately adjust the CFD for a complex corporate action such as some mergers. In these cases IB may terminate the CFD prior to the ex-date.

 

Can anyone trade IB CFDs?

All clients can trade IB CFDs, except residents of the USA, Canada, Hong Kong and Australia. Singapore residents can trade IB CFDs except those based on shares listed in Singapore. 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. 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-account 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 Share CFDs is the market data for the underlying shares. It is therefore necessary to have market data permissions for the relevant exchanges. If you already have set up market data permissions for an exchange for trading the shares, you do not need to do anything. If you want to trade CFDs on an exchange for which you do not currently have market data permissions, you can set up the permissions in the same way as you would if you planned to trade the underlying shares.

 

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 will be glad to facilitate the transfer of CFD positions, subject to the agreement of the other broker. 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.

 

Are charts available for Share CFDs?

Yes.

 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 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 a positions I can have in a specific CFD?

There is no pre-set limit. Bear in mind however that very large positions may be subject to increased margin requirements. Please refer to CFD Margin Requirements 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.

IB Stock Yield Enhancement Program

PROGRAM OVERVIEW

The Stock Yield Enhancement Program (SYEP) offers clients the opportunity to earn additional income on their full-paid shares by lending those shares to IB for on-lending to short sellers that are willing to pay to borrow them. 

Upon enrollment, Program activities are managed in their entirety by IB and require no actions on the part of participants.  These activities include the following:

- Identifying the shares in client accounts which borrowers are attempting to borrow;

- Establishing loans and returns;

- Paying interest (expressed as an interest accrual for activity statement reporting purposes) on cash collateral posted to a client’s account; and

- Reporting of loan activity, cash collateral transfers and income on the activity statements;

In contrast to the securities lending programs offered by others, IB provides complete transparency to the market rates, gross income earned from each transaction by IB and interest paid by to the client and IB. 

HOW IT WORKS

- Clients may enroll in the Program by logging into Account Management and selecting Manage Account followed by Trade Configuration and Permissions, and then checking the box at the top of the page (under Trading Programs) that says Stock Yield Enhancement. Activation generally takes place overnight. Eligible accounts include any IB LLC, IB Hong Kong, or IB Canada margin accounts and IB LLC or IB Hong Kong cash accounts with equity in excess of USD 50,000. 

- Once activated, IB will review the inventory of eligible shares on a daily basis held by the client and use eligible shares to satisfy internal and external borrow demand. If the supply of eligible shares exceeds borrow demand, clients will be allocated loans on a pro rata basis (e.g. if aggregate supply is 20,000 shares and aggregate demand 10,000, each client will be eligible to have 50% of their shares loaned).

- At the end of each day that any loan is in place, IB will pay the client interest (presented as an interest accrual) on the cash collateral posted to the client’s account for the loan. IB will retain any amounts it earns from the loan in excess of the interest paid to the client. The details regarding the transaction, including the quantity of shares loaned, collateral amount, gross income earned by IB and interest accruing to the client are reflected on the daily activity statement. 

- Clients maintain full control of loaned shares with no impairment as to:

          * Market exposure ( i.e., will continue to recognize profit or loss consistent with stock price move);

          * The ability to sell at any time without prior notice;

          * Hedges (e.g., covered calls, protective puts);

          * The representation of holdings in statements and the trading platform; and

          * Cost basis 

SPECIAL CONSIDERATIONS

- Loaned shares may not be protected by SIPC, however, the cash collateral received for the loaned securities is segregated within the 15c3-3 Reserve Account and therefore subject to the same investment restrictions;

- The interest rate that IB pays for any given loan is subject to supply and demand considerations that are outside the control of IB and which are susceptible to change from one day to another without advance notice or limit as to the magnitude of change. The interest paid to participants will reflect such changes;

- Proxy voting rights on loaned shares are forfeited (rights go to borrower);

- Participants may not receive actual dividends on loaned shares but instead a cash payment equivalent to the full dividend to be paid on the same date as the dividend (referred to as a 'Payment in Lieu'). Payments in Lieu are treated differently than a dividend for U.S. tax reporting purposes, certain taxpayers may not receive the more favorable tax treatment afforded to dividend payments deemed 'qualified'. IB generally seeks to avoid this consequence for SYEP participants by recalling shares that provide at least a 10 day notice prior to record date, so the actual dividend is paid, but this is not guaranteed.

- Loaned shares are typically used to facilitate short sales and such transactions may affect the value of shares.

 

For additional FAQs relating to the Yield Enhancement Program, click here.

 

Stock Yield Enhancement Program FAQs

What is the purpose of the Stock Yield Enhancement Program?
The Stock Yield Enhancement program provides customers with the opportunity to earn additional income on securities positions which would otherwise be segregated (i.e., fully-paid and excess margin securities) by permitting IB to lend out those securities to third parties. Customers who participate in the program will receive cash collateral to secure the return of the stock loan at its termination as well as interest on the cash collateral provided by the borrower for any day the loan exists.

 

What are fully-paid and excess margin securities?
Fully-paid securities are securities in a customer’s account that have been completely paid for. Excess margin securities are securities that have not been completely paid for, but whose market value exceeds 140% of the customer’s margin debit balance.

 

How is the income received by a customer on any given Stock Yield Enhancement Program loan transaction determined?
The income which a customer receives in exchange for shares lent depend upon loan rates established in the over-the-counter securities lending market. These rates can vary significantly not only by the particular security loaned but also by the loan date. In general, IB pays interest to participants on their cash collateral at a rate that approximates 50% of the amounts earned by IB for lending the shares. . For example, assume IB earns 15% annualized income from lending shares with a value of $10,000 and it posts $10,000 cash collateral to a participant’s account. The normal daily interest rate IB would pay to a participant on the cash collateral would be $2.08

 

How is the amount of cash collateral for a given loan determined?
The cash collateral underlying the security loan and used for determining interest payments is determined using standard industry convention whereby the closing price of the stock is multiplied by 102% and then rounded up to the nearest whole dollar. For example, a loan of 100 shares of a stock which closes at $59.24 would be equal to $6,100 ($59.24 * 1.02 = $60.4248; round to $61, multiply by 100).

 

How do long sales, transfers of securities lent via the IB Stock Yield Enhancement Program or un-enrollment affect interest?
Interest ceases to accrue on the next business day after the trade date (T+1). Interest also ceases to accrue on the next business day after the transfer input or un-enrollment date.

 

What are the eligibility requirements for participation in the IB Stock Yield Enhancement Program?
All IB LLC, IB UK, and IB Canada margin accounts or IB LLC, IB UK and IB Canada cash accounts with equity over $50,000 at the time of application are eligible. IB Japan and IB India customers are not eligible. Japanese and Indian clients maintaining accounts with IB LLC are eligible.


In addition, Financial Advisor client accounts, fully disclosed IBroker clients, non-disclosed IBroker clients and Omnibus Brokers who meet the above requirements can participate. In the case of Financial Advisors and fully disclosed IBrokers, the clients themselves must sign the agreements. For non-disclosed IBroker and Omnibus Brokers, the broker signs the agreement.

 

Are IRA accounts eligible to participate in the Stock Yield Enhancement Program?
Yes.

 

How do I enroll in the IB Stock Yield Enhancement Program?
Clients who are eligible and who wish to enroll in the Stock Yield Enhancement Program may do so by selecting Manage Account followed by Trade Configuration and Permissions, and then checking the box at the top of the page (under Trading Programs) that says Stock Yield Enhancement.

 

What happens if equity in a participating cash account falls below the $50,000 qualifying threshold?
The cash account must meet this minimum equity requirement solely at the point of signing up for the program. If the equity falls below that level thereafter there is no impact upon existing loans or the ability to initiate new loans.

 

How does one terminate Stock Yield Enhancement Program participation?

Clients who wish to terminate participation in the Stock Yield Enhancement Program may do so by selecting Trading Access and then Trading Configuration from Account Management and then removing the check from the box on the Trading Permissions matrix titled "United States (Stock Yield Enhancement Program)".
Requests to terminate are typically processed at the end of the day.

 

If an account signs up and un-enrolls at a later time, when can it be re-enrolled into the program?
After un-enrollment, the account may not re-enroll for 90 calendar days.

 

What types of securities positions are eligible to be lent?
Eligible securities include U.S. common stocks (exchange listed, PINK and OTCBB), ETFs, preferred stocks and corporate bonds. Municipal bonds and non-U.S. securities are not eligible.

 

Is there any restriction on lending stocks which are trading in the secondary market following an IPO?
No, as long as IB is not part of the selling group.

 

How does IB determine the amount of shares which are eligible to be loaned?
The first step is to determine the value of securities, if any, which IB maintains a margin lien upon and can lend without client participation in the Stock Yield Enhancement Program. A broker who finances client purchases of securities via margin loan is allowed by regulation to loan or pledge as collateral that client’s securities in an amount up to 140% of the cash debit balance. For example, if a client maintaining a cash balance of $50,000 buys securities having a market value of $100,000, the debit or loan balance will be $50,000 and the broker holds a lien on 140% of that balance or $70,000 of securities. Any securities held by the client in excess of that amount are referred to as excess margin securities ($30,000 in this example) and are required to be segregated unless the client provides IB the authorization to lend through the Stock Yield Enhancement Program.

The debit balance is determined by first converting all non-USD denominated cash balances to USD and then backing out any short stock sale proceeds (converted to USD as necessary). If the result is negative then we free up 140% of that negative number. In addition, cash balances maintained in the commodities segment or for spot metals and CFDs are not considered.

EXAMPLE 1: Customer is long EUR 100,000 in a USD Base Currency account with a EUR.USD rate of 1.40. Customer purchases USD denominated stock valued at $112,000 (EUR 80,000 equivalent). All securities are deemed fully-paid as cash balance as converted to USD is a credit.

Component EUR USD Base (USD)
Cash 100,000 (112,000) $28,000
Long Stock   $112,000 $112,000
NLV     $140,000

EXAMPLE 2: Customer holds long USD of 80,000, long USD denominated stock of $100,000 and short USD denominated stock of $100,000. Long securities totaling $28,000 are deemed margin securities and the remainder of $72,000 excess margin securities. This is determined by subtracting the short stock proceeds from the cash balance ($80,000 - $100,000) and multiplying the resultant debit by 140% ($20,000 * 1.4 = $28,000)

Component Base (USD)
Cash $80,000
Long Stock $100,000
Short Stock ($100,000)
NLV $80,000

 

Will IB lend out all eligible shares?
There is no guarantee that all eligible shares in a given account will be loaned through the Stock Yield Enhancement Program as there may not be a market at an advantageous rate for certain securities, IB may not have access to a market with willing borrowers or IB may not want to loan your shares.

 

Are Stock Yield Enhancement Program loans made only in increments of 100?
No. Loans can be made in any whole share amount although externally we only lend in multiples of 100 shares. Thus the possibility exists that we would lend 75 shares from one client and 25 from another should there be external demand to borrow 100 shares.

 

How are loans allocated among clients when the supply of shares available to lend exceeds the borrow demand?
In the event that the demand for borrowing a given security is less than the supply of shares available to lend from participants in our Yield Enhancement Program, loans will be allocated on a pro rata basis (e.g. if aggregate supply is 20,000 and demand is 10,000, each client will be eligible to have 50% of his/her shares lent)

 

Are shares loaned only to other IB clients or to other third parties?
Shares may be loaned to any counterparty and is not limited solely to other IB clients.

 

Can the Stock Yield Enhancement Program participant determine which shares IB can lend?
No. The program is entirely managed by IB who, after determining those securities, if any, which IB is authorized to lend by virtue of a margin loan lien, has the discretion to determine whether any of the fully-paid or excess margin securities can be loaned out and to initiate the loans.

 

Are there any restrictions placed upon the sale of securities which have been lent through the Stock Yield Enhancement Program?
Loaned shares may be sold at any time, without restriction. The shares do not need to be returned in time to settle your sale of the share and proceeds from the sale are credited to the client’s account on the normal settlement date. In addition, the loan will be terminated on the open of the business day following the security sale date.

 

Can a client write covered calls against stock which has been loaned out through the Stock Yield Enhancement Program and receive the covered call margin treatment?
Yes. A loan of stock has no impact upon its margin requirement on an uncovered or hedged basis since the lender retains exposure to any gains or losses associated with the loaned position.

 

What happens to stock which is the subject of a loan and which is subsequently delivered against a call assignment or put exercise?
The loan will be terminated on T+1 of the action (trade, assignment, exercise) which closed or decreased the position.

 

What happens to stock which is the subject of a loan and which is subsequently halted from trading?
A halt has no direct impact upon the ability to lend the stock and as long as IB can continue to loan the stock, such loan will remain in place regardless of whether the stock is halted.

 

Can the cash collateral from a loan be swept to the commodities segment to cover margin and/or variation?
No. The cash collateral securing the loan never impacts margin or financing.

 

What happens if a program participant initiates a margin loan or increases an existing loan balance?
If a client maintains fully-paid securities which have been loaned through the Stock Yield Enhancement Program and subsequently initiates a margin loan, the loan will be terminated to the extent that the securities do not qualify as excess margin securities. Similarly, if a client maintaining excess margin securities which have been loaned through the program increases the existing margin loan, the loan may again be terminated to the extent that the securities no longer qualify as excess margin securities.

 

Under what circumstances will a given stock loan be terminated?
In the event of any of the following, a stock loan will be automatically terminated:

- If the client elects to terminate program participation
- Transfer of shares
- Borrowing of a certain amount against the shares
- Sale of shares
- Call assignment/put exercise
- Account closure

 

Do participants in the Stock Yield Enhancement Program receive dividends on shares loaned?
While the lender of the securities is entitled to receive the amount of all dividends and distributions made on loaned securities, they may receive cash payments in lieu of dividends, commonly referred to PIL. Depending upon one’s holding period for the shares loaned, the receipt of a PIL may have an adverse tax impact for certain U.S. taxpayers as such payments are taxed as ordinary income rather than at the reduced rate associated with qualified dividends. IB will attempt to mitigate the payment of PILs by recalling loaned shares prior to a dividend, however, IB cannot guarantee that the borrower will be able to return the shares within the necessary time frame to avoid receipt of PIL.

If the account would not be tax-disadvantaged by receiving a PIL (for example, an IRA account), Interactive Brokers may intentionally keep your shares out on loan over Dividend Record Date in order to continue revenue generation for your account.

 

Do participants in the Stock Yield Enhancement Program retain voting rights for shares loaned?

No. The borrower of the securities has the right to vote or provide any consent with respect to the securities if the Record Date or deadline for voting, providing consent or taking other action falls within the loan term.

 

Do participants in the Stock Yield Enhancement Program receive rights, warrants and spin-off shares on shares loaned?

Yes. The lender of the securities will receive any rights, warrants, spin-off shares and distributions made on loaned securities.

 

How are loans reflected on the activity statement?

Loan collateral, shares outstanding, activity and income is reflected in the following 6 statement sections:


1. Cash Detail – details starting cash collateral balance, net change resulting from loan activity (positive if new loans initiated; negative if net returns) and ending cash collateral balance.

 

2. Net Stock Position Summary – for each stock details total Shares at IB, the number of Shares Borrowed, the number of Shares Lent and the Net Shares (=Shares at IB + Shares Borrowed - Shares Lent). 

 

3. IB Managed Securities Lent – lists for each stock loaned through the Stock Yield Enhancement Program the Quantity of shares loaned, the Interest Rate (%). 

 

4. IB Managed Securities Lent Activity – details the loan activity for each security including Loan Return Allocations (i.e., terminated loans); New Loan Allocations (i.e., initiated loans); the share Quantity; the Net Interest Rate (%); Interest Rate on Customer Collateral (%) and the Collateral Amount. 

 

5. IB Managed Securities Lent Activity Interest Details – details on an individual loan basis including the Interest Rate Earned by IB (%); the Income Earned by IB (represents the total income IB earns from the loan which is equal to {Collateral Amount * Interest Rate}/360); the Interest Rate on Customer Collateral (represents about half of the income IB earns on the loan) and Interest Paid to Customer (represents the interest income earned on a client’s collateral)

Note: This section will only be displayed if the interest accrual earned by the client exceeds USD 1 for the statement period.   

 

6. Interest Accruals – the interest income is accounted for here as an interest accrual and is treated as any other interest accrual (aggregated but only displayed as an accrual when exceeding $1 and posted to cash monthly). For year-end reporting purposes, this interest income will be reported on Form 1099 issued to U.S. taxpayers.

 

Considerations for Optimizing Order Efficiency

Account holders are encouraged to routinely monitor their order submissions with the objective of optimizing efficiency and minimizing 'wasted' or non-executed orders.  As inefficient orders have the potential to consume a disproportionate amount of system resources. IB measures the effectiveness of client orders through the Order Efficiency Ratio (OER).  This ratio compares aggregate daily order activity relative to that portion of activity which results in an execution and is determined as follows:

 

OER = (Order Submissions + Order Revisions + Order Cancellations) / (Executed Orders + 1)

Outlined below is a list of considerations which can assist with optimizing (reducing) one's OER:

 

1. Cancellation of Day Orders - strategies which use 'Day' as the Time in Force setting and are restricted to Regular Trading Hours should not initiate order cancellations after 16:00 ET, but rather rely upon IB processes which automatically act to cancel such orders. While the client initiated cancellation request which serve to increase the OER, IB's cancellation will not.

2. Modification vs. Cancellation - logic which acts to cancel and subsequently replace orders should be substituted with logic which simply modifies the existing orders. This will serve to reduce the process from two order actions to a single order action, thereby improving the OER.

3. Conditional Orders - when utilizing strategies which involve the pricing of one product relative to another, consideration should be given to minimizing unnecessary price and quantity order modifications. As an example, an order modification based upon a price change should only be triggered if the prior price is no longer competitive and the new suggested price is competitive.

4. Meaningful Revisions – logic which serves to modify existing orders without substantially increasing the likelihood of the modified order interacting with the NBBO should be avoided. An example of this would be the modification of a buy order from $30.50 to $30.55 on a stock having a bid-ask of $31.25 - $31.26.

5. RTH Orders – logic which modifies orders set to execute solely during Regular Trading Hours based upon price changes taking place outside those hours should be optimized to only make such modifications during or just prior to the time at which the orders are activated.

6. Order Stacking - Any strategy that incorporates and transmits the stacking of orders on the same side of a particular underlying should minimize transmitting those that are not immediately marketable until the orders which have a greater likelihood of interacting with the NBBO have executed.

7. Use of IB Order Types - as the revision logic embedded within IB-supported order types is not considered an order action for the purposes of the OER, consideration should be given to using IB order types, whenever practical, as opposed to replicating such logic within the client order management logic. Logic which is commonly initiated by clients and whose behavior can be readily replicated by IB order types include: the dynamic management of orders expressed in terms of an options implied volatility (Volatility Orders), orders to set a stop price at a fixed amount relative to the market price (Trailing Stop Orders), and orders designed to automatically maintain a limit price relative to the NBBO (Pegged-to-Market Orders).

The above is not intended to be an exhaustive list of steps for optimizing one's orders but rather those which address the most frequently observed inefficiencies in client order management logic, are relatively simple to implement and which provide the opportunity for substantive and enduring improvements. For further information or questions, please contact the Customer Service Technical Assistance Center.

 

Overview of SEC Fees

Under Section 31 of the Securities Exchange Act of 1934, U.S. national securities exchanges are obligated to pay transaction fees to the SEC based on the volume of securities that are sold on their markets. Exchange rules require their broker-dealer members to pay a share of these fees who, in turn, pass the responsibility of paying the fees to their customers.

This fee is intended to allow the SEC to recover costs associated with its supervision and regulation of the U.S. securities markets and securities professionals. It applies to stocks, options and single stock futures (on a round turn basis); however, IB does not pass on the fee in the case of single stock futures trades.  Note that this fee is assessed only to the sale side of security transactions, thereby applying to the grantor of an option (fee based upon the option premium received at time of sale) and the exerciser of a put or call assignee (fee based upon option strike price).

For the fiscal year 2016 the fee was assessed at a rate of $0.0000218 per $1.00 of sales proceeds, however, the rate is subject to annual and,in some cases, mid-year adjustments should realized transaction volume generate fees sufficiently below or in excess of targeted funding levels.1

Examples of the transactions impacted by this fee and sample calculations are outlined in the table below.

Transaction

Subject to Fee?

Example

Calculation

Stock Purchase

No

N/A

N/A

Stock Sale (cost plus commission option)

Yes

Sell 1,000 shares MSFT@ $25.87

$0.0000218 * $25.87 * 1,000 = $0.563966

Call Purchase

No

N/A

N/A

Put Purchase

No

N/A

N/A

Call Sale

Yes

Sell 10 MSFT June ’11 $25 calls @ $1.17

$0.0000218 * $1.17 * 100 * 10 = $0.025506

Put Sale

Yes

Sell 10 MSFT June ’11 $25 puts @ $0.41

$0.0000218 * $0.41 * 100 * 10 = $0.008938

Call Exercise

No

N/A

N/A

Put Exercise

Yes

Exercise of 10 MSFT June ’11 $25 puts

$0.0000218 * $25.00 * 100 * 10 = $0.545

Call Assignment

Yes

Assignment of 10 MSFT June ’11 $25 calls

$0.0000218 * $25.00 * 100 * 10 = $0.545

Put Assignment

No

N/A

N/A

 

1Information regarding current Section 31 fees may be found on the SEC's Frequently Requested Documents page located at: http://www.sec.gov/divisions/marketreg/mrfreqreq.shtml#feerate

 

 

FAQs - U.S. Securities Option Expiration

Overview: 

The following page has been created in attempt to assist traders by providing answers to frequently asked questions related to US security option expiration, exercise, and assignment.  Please feel free to contact us if your question is not addressed on this page or to request the addition of a question and answer. 

Click on a question in the table of contents to jump to the question in this document.

Table Of Contents:

How do I provide exercise instructions?

Do I have to notify IB if I want my long option exercised?

What if I have a long option which I do not want exercised?

What can I do to prevent the assignment of a short option?

Is it possible for a short option which is in-the-money not to be assigned?

What happens if I have a spread position with an in-the-money option and an out-of-the-money option?

Can IB exercise the out-of-the-money long leg of my spread position only if my in-the-money short leg is assigned?

What happens to my long stock position if a short option which is part of a covered write is assigned?

Am I charged a commission for exercise or assignments?

What happens if I am unable to meet the margin requirement on a stock delivery resulting from an option exercise or assignment?

 

Q&A:

How do I provide exercise instructions?
Instructions are to be entered through the TWS Option Exercise window. Procedures for exercising an option using the IB Trader Workstation can be found in the TWS User's Guide.

Important Note: In the event that an option exercise cannot be submitted via the TWS, an option exercise request with all pertinent details (including option symbol, account number and exact quantity), should be created in a ticket via the Account Management window. In the Account Management window, click on "Inquiry/Problem Ticket". The ticket should include the words "Option Exercise Request" in the subject line. Please provide a contact number and clearly state in your ticket why the TWS Option Exercise window was not available for use.

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Do I have to notify IB if I want my long option exercised?

In the case of exchange listed U.S. securities options, the clearinghouse (OCC) will automatically exercise all cash and physically settled options which are in-the-money by at least $0.01 at expiration (e.g., a call option having a strike price of $25.00 will be automatically exercised if the stock price is $25.01 or more and a put option having a strike price of $25.00 will be automatically exercised if the stock price is $24.99 or less). In accordance with this process, referred to as exercise by exception, account holders are not required to provide IB with instructions to exercise any long options which are in-the-money by at least $0.01 at expiration. 

Important Note: in certain situations (e.g., underlying stock halt, corporate action), OCC may elect to remove a particular class of options from the exercise by exception process, thereby requiring the account holder to provide positive notice of their intent to exercise their long option contracts regardless of the extent they may be in-the-money. In these situations, IB will make every effort to provide advance notice to the account holder of their obligation to respond, however, account holders purchasing such options on the last day of trading are not likely to be afforded any notice.

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What if I have a long option which I do not want exercised?
If a long option is not in-the-money by at least $0.01 at expiration it will not be automatically exercised by OCC. If it is in-the-money by at least that amount and you do not wish to have it exercised, you would need to provide IB with contrary instructions to let the option lapse. These instructions would need to be entered through the TWS Option Exercise window prior to the deadline as stated on the IB website.

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What can I do to prevent the assignment of a short option?
The only action one can take to prevent being assigned on a short option position is to buy back in the option prior to the close of trade on its last trading day (for equity options this is usually the Friday preceding the expiration date although there may also be weekly expiring options for certain classes). When you sell an option, you provided the purchaser with the right to exercise which they generally will do if the option is in-the-money at expiration.

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Is it possible for a short option which is in-the-money not to be assigned?
While is unlikely that holders of in-the-money long options will elect to let the option lapse without exercising them, certain holders may do so due to transaction costs or risk considerations. In conjunction with its expiration processing, OCC will assign option exercises to short position holders via a random lottery process which, in turn, is applied by brokers to their customer accounts. It is possible through these random processes that short positions in your account be part of those which were not assigned.

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What happens if I have a spread position with an in-the-money option and an out-of-the-money option?
Spread positions can have unique expiration risks associated with them. For example, an expiring spread where the long option is in-the-money by less than $0.01 and the short leg is in-the-money more than $0.01 may expire unhedged. Account holders are ultimately responsible for taking action on such positions and responsible for the risks associated with any unhedged spread leg expiring in-the-money.

 

Can IB exercise the out-of-the-money long leg of my spread position only if my in-the-money short leg is assigned?
No. There is no provision for issuing conditional exercise instructions to OCC. OCC determines the assignment of options based upon a random process which is initiated only after the deadline for submitting all exercise instructions has ended. In order to avoid the delivery of a long or short underlying stock position when only the short leg of an option spread is in-the-money at expiration, the account holder would need to either close out that short position or consider exercising an at-the-money long option.

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What happens to my long stock position if a short option which is part of a covered write is assigned?
If the short call leg of a covered write position is assigned, the long stock position will be applied to satisfy the stock delivery obligation on the short call. The price at which that long stock position will be closed out is equal to the short call option strike price.

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Am I charged a commission for exercise or assignments?
There is no commissions charged as the result of the delivery of a long or short position resulting from option exercise or assignment of a U.S. security option (note that this is not always the case for non-U.S. options).

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What happens if I am unable to meet the margin requirement on a stock delivery resulting from an option exercise or assignment?
You should review your positions prior to expiration to determine whether you have adequate equity in your account to exercise your options. You should also determine whether you have adequate equity in the account if an in-the-money short option position is assigned to your account. You should also be aware that short options positions may be exercised against you by the long holder even if the option is out-of-the-money.

If you anticipate that you will be unable to meet the margin requirement on a stock delivery resulting from an option exercise or assignment, you should either close positions or deposit additional funds to your account to meet the anticipated post-delivery margin requirement.

If an option exercise or assignment results in the delivery of a long or short stock position and the account holder does not maintain sufficient equity to meet the ensuing margin requirement, IB may liquidate positions to restore margin compliance. While IB retains the right to liquidate at any time in such situations, liquidations involving U.S. security positions will typically begin at approximately 9:40 AM ET as of the business day following expiration.

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Non-Guaranteed Combination Orders

A combination order is a special type of order that is constructed of multiple separate positions, or ‘legs’, but executed as a single transaction.  The legs of the combination may be comprised of the same position type (e.g. stock vs. stock, option vs. option or SSF vs. SSF) or different position types (e.g. stock vs. option, SSF vs. option or EFP).  It’s important to note that many combination order types, while submitted via the IB trading platform as a combination, are not native to (i.e., supported by) the exchanges and therefore may not be guaranteed by IB.  Accordingly, IB’s policy is to guarantee only Smart-Routed U.S. stock vs. option and option vs. option combination orders.

As combination orders which are not guaranteed are exposed to the risk of partial execution, both in terms of the quantity of legs and their balance, IB requires account holders to acknowledge the 'Non-Guaranteed' attribute at the point of order entry.  There are two methods for setting this attribute:

  • Method 1 - Users can select the Non-Guaranteed attribute in the Misc. section on the Order Ticket for a particular order
  • Method 2 - Users can add the Non-Guaranteed column to the Order Management section of the TWS

 

Notes:

  • Non-Guaranteed combination orders are not available for Financial Advisor allocation orders

 

The risk of such 'Non-Guaranteed' orders is illustrated through the example below:

Example

Assume the following quotes for a Stock vs. Stock combination order to purchase shares of Microsoft (MSFT) and sell shares of Appl (AAPL).

Current markets

MSFT - 26.30 bid, 26.31 offer
AAPL - 250.25 bid, 250.30 offer

A generic combination is created to buy 1 share AAPL and sell 1 share MSFT, the implied quote would be 223.94 bid, 224 offer.

The following order is entered:
Buy 200 AAPL, Sell 200 MSFT
Pay 224

Based on the current markets, the order would appear to be executable.

  • A buy of 200 shares of AAPL are routed with a 250.30 limit. Only 100 execute.
  • A sell of 200 shares of MSFT are routed with a 26.30 limit. No execution is received as the market moves to 26.29 bid.

With a Non-Guaranteed combination, the 100 shares of AAPL would be placed in the client account, even though no MSFT shares were executed.  The remainder of the combination order will continue to work until executed in its entirety or until it is canceled.

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