Margin for Trading Example

Assume base currency is USD for the  below example

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

            NetLiq    USD Equivalent

EUR:     -14,362.69     -19,712.723

KRW:   6,692,613.37        5032.04

USD:      15,073.07      15,073.07

Using exchange rates as follows

EUR USD 0.72860

KRW USD 1330.00000

 

2.  Determine the haircut rates for each currency pair

HairCut Rates

USD             EUR             .025

USD             KRW             .10

EUR             KRW             .10

 

3.  Determine the largest negative currency balance

4.  Sort the haircut rates from smallest to largest

EUR USD  0.025

EUR KRW  0.10

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

Consume 15,073.07 USD equivalent against the EUR

Margin1 = (15,073.07) x 0.025 = 376.82

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

Remaining negative net liq

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

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

Margin2 = (4,639.65) x 0.10 = 463.97

Remaining negative net liq

-4,639.65 + 4,639.65 = 0.00

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

By regulation, brokers may not allow clients to purchase mutual funds on margin. However, once purchased and held as fully-paid for a period of 30 days, the mutual fund shares have loan value which may be used to extend margin credit against subsequent stock purchases.

 

The Standard Portfolio Analysis of Risk (SPAN) is a methodology developed by the CME and used by many clearinghouses and exchanges around the world to calculate the Performance Bond (i.e., margin requirement) on futures and options on futures which the clearinghouse collects from the carrying FCM and the FCM, in turn, from the customer. 

 

SPAN establishes margin by determining what the potential worst case loss a portfolio will sustain over a given time frame (typically set to one day), using a set of 16 hypothetical market scenarios which reflect changes to the underlying price of the future or option contract and, in the case of options, time decay and a change in implied volatility. 

 

The first step in calculating the SPAN requirement is to organize all positions which share the same ultimate underlying into grouping referred to as a Combined Commodity group. Next, SPAN calculates and aggregates, by like scenario, the risk of each position within a Combined Commodity, with that scenario generating the maximum theoretical loss being the Scan Risk. The 16 scenarios are determined based upon that Combined Commodity’s Price Scan Range (the maximum underlying price movement likely to occur for the given timeframe) and Volatility Scan Range (the maximum implied volatility change likely to occur for options). 

 

Assume a hypothetical portfolio having one long future and a one long put on stock index ABC having an underlying price of $1,000, a multiplier of 100 and a Price Scan Range of 6%.  For this given portfolio, the Scan Risk would be $1,125 scenario 14.

 

 

 

#	1 Long Future	1 Long Put	Sum	Scenario Description
1	$0	$20	$20	Price unchanged; Volatility up the Scan Range
2	$0	($18)	($18)	Price unchanged; Volatility down the Scan Range
3	$2,000	($1,290)	$710	Price up 1/3 Price Scan Range; Volatility up the Scan Range
4	$2,000	($1,155)	$845	Price up 1/3 Price Scan Range; Volatility down the Scan Range
5	($2,000)	$1,600	($400)	Price down 1/3 Price Scan Range; Volatility up the Scan Range
6	($2,000)	$1,375	($625)	Price down 1/3 Price Scan Range; Volatility down the Scan Range
7	$4,000	($2,100)	$1,900	Price up 2/3 Price Scan Range; Volatility up the Scan Range
8	$4,000	($2,330)	$1,670	Price up 2/3 Price Scan Range; Volatility down the Scan Range
9	($4,000)	$3,350	($650)	Price down 2/3 Price Scan Range; Volatility up the Scan Range
10	($4,000)	$3,100	($900)	Price down 2/3 Price Scan Range; Volatility down the Scan Range
11	$6,000	($3,100)	$2,900	Price up 3/3 Price Scan Range; Volatility up the Scan Range
12	$6,000	($3,375)	$2,625	Price up 3/3 Price Scan Range; Volatility down the Scan Range
13	($6,000)	$5,150	($850)	Price down 3/3 Price Scan Range; Volatility up the Scan Range
14	($6,000)	$4,875	($1,125)	Price down 3/3 Price Scan Range; Volatility down the Scan Range
15	$5,760	($3,680)	$2,080	Price up extreme (3 times the Price Scan Range) * 32%
16	($5,760)	$5,400	($360)	Price down extreme (3 times the Price Scan Range) * 32%

 .

 

The Scan Risk charge is then added to any Intra-Commodity Spread Charges (an amount that accounts for the basis risk of futures calendar spreads) and Spot Charges (A charge that covers the increased risk of positions in deliverable instruments near expiration) and is reduced by any offset from an Inter-Commodity Spread Credit (a margin credit for offsetting positions between correlated products).  This sum is then compared to the Short Option Minimum Requirement (ensures that a minimum margin is collected for portfolios containing deep-out-of-the-money options) with the greater of the two being the risk of the Combined Commodity.  .These calculations are performed for all Combined Commodities with the Total Margin Requirement for a portfolio equal to the sum of the risk of all Combined Commodities less any credit for risk offsets provided between the different Combined Commodities.

 

The software for computing SPAN margin requirements, known as PC-SPAN is made available by the CME via its website.

 

As the IB business model, by design, is oriented towards active traders, there is no provision for dormant or inactive account status.  As long as an account remains open it will be subject to the monthly minimum activity fee of USD 10 if the account balance is above USD 2,000 (or equivalent) and USD 20 once the account balance falls below USD 2,000 (this minimum activity fee is set at USD 3 for account holders age 25 and under).   Also, should the account balance falls below USD 2,000 IB is precluded, by regulation, from affording margin treatment to securities positions.   In addition, account holders will also be billed for any market data subscriptions maintained and, as a matter of policy, will have subscriptions terminated automatically when the account balance falls below USD 500. Also note that the monthly minimum activity fee will continue to be assessed until such time the account no longer has equity, at which point it will be automatically closed. Any request to re-open a closed account will require that the account be funded with the minimum account opening deposit of US 10,000, or equivalent. Individuals seeking to close an account are encouraged to refer to the section on our website under the menu items Accounts and then Close an Account to familiarize themselves with the steps and prerequisites for taking this action.