Considerations for Exercising Call Options Prior to Expiration

INTRODUCTION

Exercising an equity call option prior to expiration ordinarily provides no economic benefit as:

  • It results in a forfeiture of any remaining option time value;
  • Requires a greater commitment of capital for the payment or financing of the stock delivery; and
  • May expose the option holder to greater risk of loss on the stock relative to the option premium.

Nonetheless, for account holders who have the capacity to meet an increased capital or borrowing requirement and potentially greater downside market risk, it can be economically beneficial to request early exercise of an American Style call option in order to capture an upcoming dividend.

BACKGROUND

As background, the owner of a call option is not entitled to receive a dividend on the underlying stock as this dividend only accrues to the holders of stock as of its dividend Record Date. All other things being equal, the price of the stock should decline by an amount equal to the dividend on the Ex-Dividend date. While option pricing theory suggests that the call price will reflect the discounted value of expected dividends paid throughout its duration, it may decline as well on the Ex-Dividend date.  The conditions which make this scenario most likely and the early exercise decision favorable are as follows:

1. The option is deep-in-the-money and has a delta of 100;

2. The option has little or no time value;

3. The dividend is relatively high and its Ex-Date precedes the option expiration date. 

EXAMPLES

To illustrate the impact of these conditions upon the early exercise decision, consider an account maintaining a long cash balance of $9,000 and a long call position in hypothetical stock “ABC” having a strike price of $90.00 and time to expiration of 10 days. ABC, currently trading at $100.00, has declared a dividend of $2.00 per share with tomorrow being the Ex-Dividend date. Also assume that the option price and stock price behave similarly and decline by the dividend amount on the Ex-Date.

Here, we will review the exercise decision with the intent of maintaining the 100 share delta position and maximizing total equity using two option price assumptions, one in which the option is selling at parity and another above parity.

SCENARIO 1: Option Price At Parity - $10.00
In the case of an option trading at parity, early exercise will serve to maintain the position delta and avoid the loss of value in long option when the stock trades Ex-Dividend. preserve equity. Here the cash proceeds are applied in their entirety to buy the stock at the strike, the option premium is forfeited and the stock, net of dividend, and the dividend receivable are credited to the account.  This can also be accomplished with the same end result by selling the option prior to the Ex-Dividend date and purchasing the stock:

SCENARIO 1

Account

Components

Beginning

Balance

Early

Exercise

No

Action

Sell Option &

Buy Stock

Cash $9,000 $0 $9,000 $0
Option $1,000 $0 $800 $0
Stock $0 $9,800 $0 $9,800
Dividend Receivable $0 $200 $0 $200
Total Equity $10,000 $10,000 $9,800 $10,000

 

 

SCENARIO 2: Option Price Above Parity - $11.00
In the case of an option trading above parity, early exercise to capture the discount, while preferable to inaction, may not be economically beneficial. In this scenario, early exercise would result in a loss of $100 in option time value and inaction a loss equal to the $200 dividend. Here, the preferable action would be to sell the option to capture the time value and buy the stock, thereby realizing the dividend.

SCENARIO 2

Account

Components

Beginning

Balance

Early

Exercise

No

Action

Sell Option &

Buy Stock

Cash $9,000 $0 $9,000 $100
Option $1,100 $0 $900 $0
Stock $0 $9,800 $0 $9,800
Dividend Receivable $0 $200 $0 $200
Total Equity $10,100 $10,000 $9,900 $10,100

  

NOTE: Account holders holding a long call position as part of a spread should pay particular attention to the risks of not exercising the long leg given the likelihood of being assigned on the short leg.  Note that the assignment of a short call results in a short stock position and holders of short stock positions as of a dividend Record Date are obligated to pay the dividend to the lender of the shares. In addition, the clearinghouse processing cycle for exercise notices does not accommodate submission of exercise notices in response to assignment.

As example, consider a credit call (bear) spread on the SPDR S&P 500 ETF Trust (SPY) consisting of 100 short contracts in the March '13 $146 strike and 100 long contracts in the March '13 $147 strike.  On 3/14/13, with the SPY Trust declared a dividend of $0.69372 per share, payable 4/30/13 to shareholders of record as of 3/19/13. Given the 3 business day settlement time frame for U.S. stocks, one would have had to buy the stock or exercise the call no later than 3/14/13 in order receive the dividend, as the next day the stock began trading Ex-Dividend. 

On 3/14/13, with one trading day left prior to expiration, the two option contracts traded at parity, suggesting maximum risk of $100 per contract or $10,000 on the 100 contract position. However, the failure to exercise the long contract in order to capture the dividend and protect against the likely assignment on the short contracts by others seeking the dividend created an additional risk of $67.372 per contract or $6,737.20 on the position representing the dividend obligation were all short calls assigned.  As reflected on the table below, had the short option leg not been assigned, the maximum risk when the final contract settlement prices were determined on 3/15/13 would have remained at $100 per contract.

Date SPY Close March '13 $146 Call March '13 $147 Call
March 14, 2013 $156.73 $10.73 $9.83
March 15, 2013 $155.83   $9.73 $8.83

For information regarding how to submit an early exercise notice please see the IB website.

 

The above article is provided for information purposes only as is not intended as a recommendation, trading advice nor does it constitute a conclusion that early exercise will be successful or appropriate for all customers or trades. Account holders should consult with a tax specialist to determine what, if any, tax consequences may result from early exercise and should pay particular attention to the potential risks of substituting a long option position with a long stock position.

SPY - Dividend Recognition

Unlike the case of a stock, in which a dividend is taxable in the year in which it is paid, the SPDR S&P 500 ETF Trust (Symbol: SPY) represents itself as a Regulated Investment Company and its dividend is deemed taxable in the year in which the record date is determined.  As such, SPY dividends declared in either October, November or December and payable to shareholders of record on a specified date in one of those months will be considered taxable income income in that year despite the fact that such dividend will generally be paid in January of the following year.

 

Circular 230 Notice: These statements are provided for information purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor.

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 price of 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 directlty 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 2400 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)
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
Sweden OMX Stockholm 30
Finland OMX Helsinki 25
Denmark OMX Copenhagen 30
Japan Nikkei 225

 

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.  Portf. 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 and commodities?

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. 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.

Overview of the OneChicago NoDiv Contract

The OneChicago NoDiv single stock futures contract (OCX.NoDivRisk) differs from the Exchange's traditional single stock futures contract by virtue of its handling of ordinary distributions (e.g., dividends, capital gains, etc.).  Whereas the traditional contract is not adjusted for such ordinary distributions (the discounted expectations are reflected in the price), the NoDiv contract is intended to remove the risk of dividend expectations through a price adjustment made by the clearinghouse. The adjustment is made on the morning of the ex-date to ensure that the effect of the distribution is removed from the daily mark-to-market or cash variation pay/collect.

For example, assume a NoDiv contract which closes at $50.00 on the business day prior the ex-date at which stockholders of a $1.00 dividend are to be determined. On the ex-date OCC will adjust that prior day's final settlement price from $50.00 downward by the amount of the dividend to $49.00. The effect of this adjustment will be to ensure that the dividend has no impact upon the cash variation pay/collect as of ex-date close (i.e., short position holder does not receive the $1.00 variation collect and the long holder incur the $1.00 payment).


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 a portion of the fee paid by the borrower as loan compensation for any day the loan exists and will receive cash collateral to secure the return of the stock loan at its termination.

 

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 addition, IB assesses a Management Fee equal to 50% of the net loan fees paid in exchange for initiating, terminating and managing transactions. In determining the customer’s portion of these fees, the Market Fee Rate % is applied to the loan collateral and this daily Gross Lending Fee is split equally between IB and the customer.  For example, assume loan collateral of $10,000 and an annualized Market Fee Rate of 15%. In this example the daily Gross Lending Fee would be $4.16 (($10,000 *.15)/360), of which $2.08 would accrue to the customer and $2.08 to IB as its Management Fee. Lending fees are calculated and accrued daily similar to interest credits.

 

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).

 

What are the eligibility requirements for participation in the IB Stock Yield Enhancement Program?
All IB LLC and IB UK margin accounts or IB LLC and IB UK cash accounts with equity over $50,000 at the time of application are eligible. IB Canada, 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 Trading Access and then Trading Configuration from Account Management and then checking the box on the Trading Permissions matrix titled "United States (Stock Yield Enhancement Program)".

 

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.

 

What is the difference between AQS and the IB Stock Yield Enhancement Program?
Clients lending through AQS participants self-direct their activity based upon information provided via AQS’ automated centralized market. In contrast, loans transacted through the Stock Yield Enhancement Program are determined and managed by IB.

 

Can I participate in both AQS and the IB Stock Yield Enhancement Program?
Clients can only lend in one program at a time. If, for example, a client signs up for the Yield program and is already approved for AQS lending, we will disable their ability to lend at AQS and recall their loans. They will still, however, retain the ability to borrow through AQS and can see market data. If the client disables the Yield Enhancement Program, their AQS loan permissions will be re-enabled. In sum, the yield program always takes precedence.

 

If my account is eligible for AQS am I automatically eligible to participate in the IB Stock Yield Enhancement Program?
No.

 

If my account is eligible for the IB Stock Yield Enhancement Program am I automatically eligible to participate in AQS?
No.

 

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.

 

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 (similar to AQS)?
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, commonly referred to PILs, in lieu of dividends. Depending upon ones 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 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 PIL treatment.

 

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.

 

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 (through AQS or the Stock Yield Enhancement Program) and the Net Shares (=Shares at IB + Shares Borrowed - Shares Lent).

 

3. IB Managed Securities Lent – lists for each stock loaned through AQS or the Stock Yield Enhancement Program the Quantity of shares loaned, the Net Fee Rate (%) and the Collateral Amount.

 

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 Fee Rate (%) and the Collateral Amount.

 

5. IB Managed Securities Lent Activity Fee Details – details on an individual loan basis the Market Fee Rate (%); the Gross Lend Fee (represents the total fee charged to the borrower which is equal to {Collateral Amount * Market Fee Rate}/360); the IB Management Charge (equals 50% of the Gross Lend Fee); the Net Lend Fee Rate (represents the half of the Market Fee Rate which the client earns) and the Net Lend Fee (represents the client’s portion of the fee income. Equals the Gross Lend Fee - IB Management Charge).
Note: This section will only be displayed if the Net Lend Fee accrual exceeds USD 1 for the statement period.  

 

6. Interest Accruals – the loan fee 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 fee income will be reported as miscellaneous income on the Form 1099 issued to U.S. taxpayers.

 

Dividend withholding procedures for foreign stocks traded in Japan

Foreign stocks listed for trading in Japan which issue dividends will have the cash dividend allocation subject to an increased withholding tax rate. The tax will vary based on the domicile of the stock issuing the dividend; however in general the withholding rate will be the highest withholding rate applicable and will not incorporate a reduction based on prevailing tax treaties.

This treatment is due to the tax reporting status of Interactive Brokers's clearing agent. As our clearing agent is unable to process the relevant tax declaration documentation which would allow for the application of tax withholding at a reduced rate, shareholders will be subject to the highest rate.

In order to avoid the application of the tax withholding on the dividends of foreign stocks, positions in such dividend paying stocks should be closed prior to the ex-dividend date.

We recommend that customers consult with their tax advisor for assistance in determining the eligibility, if any, for a tax credit on this withholding.

A list of foreign stocks and their applicable rates is provided below. Please be aware that the below is for informational purposes only and may not include all stocks which may be subject to the higher withholding rates.

Stock Code Stock Name DividendTax Rate
1412 China Boqi Environmental Solutions Technology Co Ltd N/A
1773 YTL Corporation Berhad 25%
3827 Japaninvest Group plc N/A
4850 The Dow Chemical Company 30%
5412 POSCO 22%
8634 JPMorgan Chase & Co 30%
8648 Bank of America Corporation 30%
8685 American International Group Inc 30%
8686 Aflac Incorporated 30%
8710 Citigroup Inc 30%
9399 Xinhua Finance Limited N/A
9481 Telefonica S.A 19%

 

 

Dividend withholding procedures for entities issuing dual-sourced income

U.S. persons holding securities issued by entities that are domiciled outside of the U.S., but which invest within the U.S. should pay particular attention to IB's tax withholding obligation in the event of a distribution by the issuer. These entities, which may include Canadian unit trusts, REITS, limited partnerships or other common shares, often distribute dividends and/or interest based on both the U.S. and non-U.S. sourced income. While U.S. persons reporting a valid taxpayer ID number on their Form W-9 are generally exempt from backup withholding on U.S. sourced income, the nature of the custodial arrangement for these particular securities is such that U.S persons may be subject to a withholding tax calculated at a fixed rate of 30% on that portion of the distribution associated with the US-sourced income. This is in addition to any withholding required to be applied to the non-U.S. sourced portion of the distribution as required by the relevant foreign taxing body.

It's important to note that these taxes will be withheld by the depository prior to remittance of the distribution to IB and the subsequent credit of the net distribution to the accounts of any U.S. persons. Accordingly, IB has no ability to reverse or reclaim the withholding on behalf of its clients. In addition, as IB does not remit the withholdings to the tax authority, we do not report such withholdings to either the tax authority or clients on their year-end tax forms.

As IB does not provide tax advice or guidance, we recommend that you consult with your tax advisor for assistance in determining the eligibility, if any, for a tax credit on this withholding.

Below lists securities where this type of withholding has been applied previously. This list is for informational purposes only and may not include all securities.

Symbol Security Name
CHE.UN Chemtrade Logistics Income Fund
CSH.UN Chartwell Seniors Housing Real Estate Investment Trust
DR.UN Medical Facilities Corp
EXE.UN Extendicare real Estate Investment Trust
FCE.UN Fort Chicago Energy Partnerships LP
HR.UN H&R Real Estate Investment Trust
NFI.UN New Flyer Industries Inc
UFS Domtar Corp
UVI Unilens Vision Inc

 

Tax Treaty Benefits

Overview: 

Income payments (dividends and payment in lieu) from U.S. sources into your IB account may have U.S. tax withheld.  Generally, a 30% rate is applied to non-U.S. accounts.  Exemption from the withholding or a lower rate may apply if your home country has a tax treaty with the U.S.  Complete the applicable Form W-8 to find out your status. 

Background: 

Tax Treaties*

U.S. tax treaties with some countries have different benefits.  Legal tax residents of the following countries may be eligible for the treaty benefits.  Below is a list of the tax treaty countries.  Benefits vary by country.

Australia Czech Republic India Lithuania Sweden
Austria Denmark Indonesia Poland Switzerland
Bangladesh Egypt Ireland Portugal Thailand
Barbados Estonia Israel Romania Trinidad & Tobago
Belgium Finland Italy Russia Tunisia
Bulgaria France Jamaica Slovak Republic Turkey
Canada Germany Japan Slovenia Ukraine
China, People's Rep. Of Greece Kazakhstan South Africa United Kingdom
Commonwealth of Ind. States Hungary Korea, Rep. of Spain Venezuela
Cyprus Iceland Latvia Sri Lanka  

*Country list as of April 2009

 

Refer to IRS Publication 901 for details on withholding rates for your tax residence country and your eligible benefits.

 

What corporate action services does Interactive Brokers provide?

Interactive Brokers services relating to corporate actions are as follows:

1. The processing of mandatory corporate actions (e.g. prompt dividend recovery, spin-offs, stock splits, effective mergers and etc.) at no extra cost; and

2. Providing, on a best efforts basis, details of corporate action announcements associated with stock and option positions held in your account.  These details are provided in the form of a web ticket posted to the Corporate Actions tab of your Message Center.  Account holders may also elect to set their preferences so as to receive a copy of such details via email.  Information provided includes

  • Mandatory offers - general information regarding mandatory offers
  • Voluntary offers - eligible account holders may submit elections directly through Account Management

 

IMPORTANT NOTE:
Interactive Brokers does not provide any guidance, consultation or advice regarding corporate actions to its customers. IB customers are solely responsible for the monitoring of the existence of a corporate action, understanding the rights and terms of any corporate action and providing timely and accurate instructions regarding the handling for any voluntary corporate action.

Which Tax Form Should I Select?

Overview: 

3 simple questions can help you choose a tax certification form.   Read the questions and select the form.  For more detailed help, see Tax Information & Reporting.

Question # 1:      Are you a U.S. Person or a U.S. Entity?

• U.S. Citizen • U.S. Business or Organization
• U.S. Green Card Holder • U.S. Domestic Trust
                                       • U.S. Legal Resident

If the answer is YES, complete Form W-9

If the answer is NO, go to # 2.

Question # 2:      Do you have a U.S. Visa?

 

• H-1B Visa Holder • TN Visa Holder         
                                         • O-1 Visa Holder

If the answer is YES, find your status by the "substantial presence test." See More U.S. Legal Resident Info 

If the answer is NO, go to # 3.

Question # 3:      Are you a Legal Resident or Entity of another country?

                                      *Question does Not apply to U.S. Citizens/Entities or Green Card Holders

• Permanent Home Outside of U.S • Entity Formed Outside of U.S.
                                      •Business or Organization formed outside of U.S.

If the answer is YES, complete Form W-8  (U.S. Citizens, Green Card Holders, and Entities still complete the W-9.)

NOT SURE because you work, live, or study in the U.S. then, see More U.S. Legal Resident Info 

 

Disclaimer:  IB does not provide tax advice. These statements are provided for information purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any international, federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor. We recommend that you consult a qualified tax adviser or refer to the U.S. Internal Revenue Service.

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