Trading on margin in an IRA account

IRA accounts, by definition, may not use borrowed funds to purchase securities and must pay for all long stock purchases in full, may not carry short stock positions and may not hold a debit cash balance (in any currency). IRA accounts are eligible to carry futures and option contracts. In addition, IB offers a specific form of IRA account referred to as a “Margin IRA” that allows the account holder to trade with unsettled funds, carry American style option spreads and maintain long balances in multiple currency denominations.

For additional information regarding trading permissions in an IRA account, refer to KB188.
 

How to determine if you are borrowing funds from IB

If the aggregate cash balance in a given account is a debit, or negative, then funds are being borrowed and the loan is subject to interest charges. A loan may still exist, however, even if the aggregate cash balance is a credit, or positive, as a result of balance netting or timing differences. The most common examples of this are as follows:

 
1.       Long vs. Short Currency Balances – accounts holders may borrow cash denominated in one currency if it can be secured by a credit balance in another.  Take, for example, a USD base currency account holding a long USD settled cash balance of 10,000, a short EUR settled cash balance of 5,000, with a EUR.USD exchange rate of 1.38:1. Here, for statement reporting and interest computation purposes, the overall cash balance is a USD credit of 3,088 (10,000 – (5,000 * 1.38)). As each currency is subject to a unique funding and reinvestment arrangement, the short balance would be subject to financing costs based upon its benchmark rate and tier. This cost may be offset by any interest earned on the long balance based upon its benchmark rate and tier.
 
2.       Gross Balances by Segment – IB’s Universal Account contains multiple sub accounts or segments, each of which holds positions and collateral which, for regulatory and customer protection purposes, may not be commingled. This separation does not allow for netting of balances across segments and a credit in one segment may therefore not offset a debit in another. Take, for example, an IB LLC account holding both securities and commodities positions with the securities segment maintaining a debit cash balance of USD 3,000 and the commodities segment a credit cash balance of USD 8,000. While the account holds an overall net credit balance of USD 5,000, the short balance would be subject to an interest charge which may be partially offset by any interest earned on the long balance.
 
3.       Short Sales – a short sale is a margin transaction in which the account holder is borrowing stock rather than cash. While the proceeds from the short sale are credited to the cash balance of the account, these funds must be posted with the lender of the shares as collateral to secure their return. As a result, and in recognition of the fact that the loan transaction is subject to its own financing terms, the cash collateralizing the loan is excluded for the purpose of determining whether a margin loan exists.
 
As example, consider an account reporting net liquidating equity (all balances in USD) of  9,000 comprised of a credit cash balance of 4,000, long stock valued at 10,000 and short stock valued at 5,000. In order to determine whether funds are being borrowed to finance the long stock position, the 5,000 portion of the cash pledged as collateral to the lender of the shares is deducted from the overall 4,000 cash balance, resulting in a 1,000 debit. This debit is subject to interest charges and the cash underlying the stock borrow either an interest charge in the case of hard to borrow shares or a short stock rebate if the shares are easy to borrow and reinvestment rates sufficiently high.
 
4.       Unsettled Funds - borrowings are determined based upon settled funds and the timeframe by which payment is due or received for a given transaction is product specific (e.g., stocks generally settle in 3 business days, spot currencies 2 and derivatives 1). For statement and trading platform purposes, cash balances are reported on a trade date rather than settlement date basis, as if settlement has completed.
 
As a result, an account reporting a credit cash balance may, in fact, still be carrying a margin loan if that balance includes proceeds from the sale of stock purchased with borrowed funds awaiting settlement. Similarly, an account may report a trade date based debit balance, but not yet incurring a margin loan and interest charges, as the trade has not yet settled.
 
For additional information regarding interest calculations, please refer to How Interest is Calculated.

Overview of Margin Methodologies

Introduction

The methodology used to calculate the margin requirement for a given position is largely determined by the following three factors:
 
1.      The product type;
2.      The rules of the exchange on which the product is listed and/or the primary regulator of the carrying broker;
3.      IB’s “house” requirements.
 
While a number of methodologies exist, they tend to be categorized into one of two approaches: rules based or risk based.  Rules based methods generally assume uniform margin rates across like products, offer no inter-product offsets and consider derivative instruments in a manner similar to that of their underlying. In this sense, they offer ease of computation but oftentimes make assumptions which, while simple to execute, may overstate or understate the risk of an instrument relative to its historic performance. A common example of a rules based methodology is the U.S. based Reg. T requirement.
 
In contrast, risk based methodologies often seek to apply margin coverage reflective of the product’s past performance, recognize some inter-product offsets and seek to model the non-linear risk of derivative products using mathematical pricing models. These methodologies, while intuitive, involve computations which may not be easily replicable by the client. Moreover, to the extent that their inputs rely upon observed market behavior, may result in requirements that are subject to rapid and sizable fluctuation. Examples of risk based methodologies include TIMS and SPAN,
 
Regardless of whether the methodology is rules or risk based, most brokers will apply “house” margin requirements which serve to increase the statutory, or base, requirement in targeted instances where the broker’s view of exposure is greater than that which would satisfied solely by meeting that base requirement. An overview of the most common risk and rules based methodologies is provided below.
 
Methodology Overview
  
Risk Based
a.      Portfolio Margin (TIMS) – The Theoretical Intermarket Margin System, or TIMS, is a risk based methodology created by the Options Clearing Corporation (OCC) which computes the value of the portfolio given a series of hypothetical market scenarios where price changes are assumed and positions revalued. The methodology uses an option pricing model to revalue options and the OCC scenarios are augmented by a number of house scenarios which serve to capture additional risks such as extreme market moves, concentrated positions and shifts in option implied volatilities. In addition, there are certain securities (e.g., Pink Sheet, OTCBB and low cap) for which margin may not be extended. Once the projected portfolio values are determined at each scenario, the one which projects the greatest loss is the margin requirement.
 
Positions to which the TIMS methodology is eligible to be applied include U.S. stocks, ETFs, options, single stock futures and Non U.S. stocks and options which meet the SEC’s ready market test.
 
As this methodology uses a much more complex set of computations than one that is rules based, it tends to more accurately model risk and generally offers greater leverage. Given its ability to offer enhanced leverage and that the requirements fluctuate and may react quickly to changing market conditions, it is intended for sophisticated individuals and requires minimum equity of $110,000 to initiate and $100,000 to maintain. Requirements for stocks under this methodology generally range from 15% to 30% with the more favorable requirement applied to portfolios which contain a highly diversified group of stocks which have historically exhibited low volatility and which tend to employ option hedges.
 
b.       SPAN – Standard Portfolio Analysis of Risk, or SPAN, is a risk-based margin methodology created by the Chicago Mercantile Exchange (CME) that is designed for futures and future options.  Similar to TIMS, SPAN determines a margin requirement by calculating the value of the portfolio given a set of hypothetical market scenarios where underlying price changes and option implied volatilities are assumed to change. Again, IB will include in these assumptions house scenarios which account for extreme price moves along with the particular impact such moves may have upon deep out-of-the-money options. The scenario which projects the greatest loss becomes the margin requirement. A detailed overview of the SPAN margining system is provided in KB563.
 
Rules Based
a.      Reg. T – The U.S. central bank, the Federal Reserve Board, holds responsibility for maintaining the stability of the financial system and containing systemic risk that may arise in financial markets. It does this, in part, by governing the amount of credit that broker dealers may extend to customers who borrow money to buy securities on margin. 
 
This is accomplished through Regulation T, or Reg. T as it is commonly referred, which provides for establishment of a margin account and which imposes the initial margin requirement and payment rules on certain securities transactions. For example, on stock purchases, Reg. T currently requires an initial margin deposit by the client equal to 50% of the purchase value, allowing the broker to extend credit or finance the remaining 50%. For example, an account holder purchasing $1,000 worth of securities is required to deposit $500 and allowed to borrow $500 to hold those securities.
 
Reg. T only establishes the initial margin requirement and the maintenance requirement, the amount necessary to continue holding the position once initiated, is set by exchange rule (25% for stocks). Reg. T also does not establish margin requirements for securities options as this falls under the jurisdiction of the listing exchange’s rules which are subject to SEC approval.  Options held in a Reg.T account are also subject to a rules based methodology where short positions are treated like a stock equivalent and margin relief is provided for spread transactions. Finally, positions held in a qualifying portfolio margin account are exempt from the requirements of Reg. T. 

 

Where to Learn More

Key margin definitions

Tools provided to monitor and manage margin

Determining buying power

How to determine if you are borrowing funds from IB

Why does IB calculate and report a margin requirement when I am not borrowing funds?

Trading on margin in an IRA account

What is SMA and how does it work?

Securities Subject to Higher House Margin Requirement

Background: 

Outlined below is a list of securities which IB has placed subject to a house maintenance margin requirement equal to the greater of 35% or existing (if higher) effective as of the October 11, 2013 U.S. open. Please note that these securities remain under elevated risk review and subject to further increases over the upcoming days.

Symbol Name
169 WANDA COMMERCIAL PROPERTIES
566 HANERGY SOLAR GROUP LTD
1808 HASEKO CORP
3765 GUNGHO ONLINE ENTERTAINMENT
3888 KINGSOFT CORP LTD
4321 KENEDIX, INC
4974 TAKARA BIO INC
7004 HITACHI ZOSEN CORP
7774 JAPAN TISSUE ENGINEERING CO
 AAMC ALTISOURCE ASSET MANAGEMENT
 ACAD ACADIA PHARMACEUTICALS INC
 AEGR AEGERION PHARMACEUTICALS INC
 BSL BLUESCOPE STEEL LTD
 CLDX CELLDEX THERAPEUTICS INC
 CSIQ CANADIAN SOLAR INC
 FB FACEBOOK INC
 FNM FANNIE MAE
 HIMX HIMAX TECHNOLOGIES INC
 LIN LIN MEDIA LLC
 MTG MGIC INVESTMENT CORP
 MU MICRON TECHNOLOGY INC
 NFLX NETFLIX INC
 NQ NQ MOBILE INC
 OCDO OCADO GROUP PLC
 RAD RITE AID CORP
 SCTY SOLARCITY CORP
 SHLD SEARS HOLDINGS CORP
 SPWR SUNPOWER CORP
 TCG THOMAS COOK GROUP PLC (FWB)
 TCG THOMAS COOK GROUP PLC (LSE)
 TL0 TESLA MOTORS INC (FWB)
 TSLA TESLA MOTORS INC
 VIPS VIPSHOP HOLDINGS LTD
 VWS VESTAS WIND SYSTEMS A/S
 WLH WILLIAM LYON HOMES
 YELP YELP INC
QIHU QIHOO 360 TECHNOLOGY CO
SFUN SOUFUN HOLDINGS LTD
SRPT SAREPTA THERAPEUTICS INC

 Revision Date: 10/10/13

 

Margin Loan Restrictions

Overview: 

As a result of recently imposed regulatory restrictions, IB has implemented a margin change, the effect of which is to restrict Australian residents from creating or increasing a margin loan. While this change is intended to be temporary in duration, IB is currently unable to confirm the date at which margin lending will be restored for Australian residents. In the meantime, clients are encouraged to log into Account Management, if they have not already done so, to review the Regulatory Notice which provides more detailed information.

Key implications of this change are as follows:

- The change only impacts accounts belonging to natural persons and does not affect most organizations

- The change applies to securities transactions and does not directly impact futures or forex transactions

In addition, outlined below are a series of FAQs relating to this topic.

 

AUSTRALIAN MARGIN RESTRICTION FAQS

1. Does this margin restriction mean that account holders can no longer trade?

No. Account holders who log into Account Management and affirm the Customer Agreement may continue to trade securities using cash (i.e., must pay for securities transactions in full) and, if approved, futures and forex.

 

2. What happens if an account holder attempts to enter an opening order which would create or increase a margin loan balance?

Opening orders which serve to create or increase the loan balance will prompt the following alert message when transmitted and will be rejected:

 

3. Will this restriction prevent account holders from entering closing orders?

No. Account holders who experience problems transmitting orders which close positions should contact their local Customer Service Center.

 

4. Does this margin restriction apply to all Australian residents?

No. This restriction applies solely to accounts associated with a natural personal and not entities such as corporations. In the case of trust accounts, the restriction applies if any of the trustees are natural persons.

 

5. Does this margin restriction apply to all products?

No. The restriction applies to securities transactions and not futures or forex. Note, however, cash may not be transferred from the securities segment to support the margin required on a futures transaction if that transfer would serve to create or increase a margin loan within the securities segment.

 

6. Does this restriction require that I immediately pay back my current margin loan?

No. The restriction does not impose any time condition with respect to the payment of existing margin loans. Such loans may be sustained at their current level as long as client continues to remain margin compliant.  The margin loan balance, however, may not be increased.

 

7. If I repay a margin loan either in whole or in part will I later be able to obtain a loan for portion which has been repaid?

No. Reductions to a margin loan made subsequent to the implementation of this restriction serve to place a new cap on the size of the loan allowed. In other words, no order will be accepted which would serve to create or increase the loan balance in effect at the point of its entry.

 

8. Does this margin restriction impact cash withdrawals?

If after giving effect to the withdrawal a margin loan would be created or increased, then the withdrawal will not be allowed.

 

9. Where can I get additional information or direct my questions?

IB has set up a special email address for inquiries relating to the Australian margin restriction. Please forward such inquiries to: auclients@interactivebrokers.com

Determining Buying Power

Buying power serves as a measurement of the dollar value of securities that one may purchase in a securities account without depositing additional funds. In the case of a cash account where, by definition, securities may not be purchased using funds borrowed from the broker and must be paid for in full, buying power is equal to the amount of settled cash on hand. Here, for example, an account holding $10,000 in cash may purchase up to $10,000 in stock.

In a margin account, buying power is increased through the use of leverage provided by the broker using cash as well as the value of stocks already held in the account as collateral. The amount of leverage depends upon whether the account is approved for Reg. T margin or Portfolio Margin. Here, a Reg. T account holding $10,000 in cash may purchase and hold overnight $20,000 in securities as Reg. T imposes an initial margin requirement of 50%, which translates to buying power of 2:1 (i.e., 1/.50). Similarly, a Reg. T account holding $10,000 in cash may purchase and hold on an intra-day basis $40,000 in securities given IB’s default intra-day maintenance margin requirement of 25%, which translates to buying power of 4:1 (i.e., 1/.25).

In the case of a Portfolio Margin account, greater leverage is available although, as the name suggests, the amount is highly dependent upon the make-up of the portfolio. Here, the requirement on individual stocks (initial = maintenance) generally ranges from 15% - 30%, translating to buying power of between 6.67 – 3.33:1. As the margin rate under this methodology can change daily as it considers risk factors such as the observed volatility of each stock and concentration, portfolios comprised of low-volatility stocks and which are diversified in nature tend to receive the most favorable margin treatment (e.g., higher buying power).

In addition to the cash examples above, buying power may be provided to securities held in the margin account, with the leverage dependent upon the loan value of the securities and the amount of funds, if any, borrowed to purchase them. Take, for example, an account which holds $10,000 in securities which are fully paid (i.e., no margin loan). Using the Reg. T initial margin requirement of 50%, these securities would have a loan value of $5,000 (= $10,000 * (1 - .50)) which, using that same initial requirement providing buying power of 2:1, could be applied to purchase and hold overnight an additional $10,000 of securities. Similarly, an account holding $10,000 in securities and a $1,000 margin loan (i.e., net liquidating equity of $9,000), has a remaining equity loan value of $4,000 which could be applied to purchase and hold overnight an additional $8,000 of securities. The same principals would hold true in a Portfolio Margin account, albeit with a potentially different level of buying power.

Finally, while the concept of buying power applies to the purchase of assets such as stocks, bonds, funds and forex, it does not translate in the same manner to derivatives. Most securities derivatives (e.g., short options and single stock futures) are not assets but rather contingent liabilities and long options, while an asset, are short-term in nature, considered a wasting asset and therefore generally have no loan value. The margin requirement on short options, therefore, is not based upon a percentage of the option premium value, but rather determined on the underlying stock as if the option were assigned (under Reg. T) or by estimating the cost to repurchase the option given adverse market changes (under Portfolio Margining).

Margin Treatment for Foreign Stocks Carried by a U.S. Broker

As a U.S. broker-dealer registered with the Securities & Exchange Commission (SEC) for the purpose of facilitating customer securities transactions, IB LLC is subject to various regulations relating to the extension of credit and margining of those transactions. In the case of foreign equity securities (i.e., non-U.S. issuer), Reg T. allows a U.S. broker to extend margin credit to those which either appear on the Federal Reserve Board's periodically published List of Foreign Margin Stocks, or are deemed to have a have a "ready market" under SEC Rule 15c3-1 or SEC no-action letter.

Prior to November 2012, "ready market" was deemed to include equity securities of a foreign issuer that are listed on what is now known as the FTSE World Index. This definition was based upon a 1993 SEC no-action letter and was premised upon the fact that, while there may not have been a ready market for such securities within the U.S., the securities could be readily resold in the applicable foreign market.  In November of 2012, the SEC issued a follow-up no-action letter (www.sec.gov/divisions/marketreg/mr-noaction/2012/finra-112812.pdf) which expanded the population of foreign equity securities deemed to have a ready market to also include those not listed on the FTSE World Index provided that the following four conditions are met:

 

1. The security is listed on a foreign exchange located within a FTSE World Index recognized country, where the security has been trading on the exchange for at least 90 days;

2. Daily bid, ask and last quotations for the security as provided by the foreign listing exchange are made continuously available to the U.S. broker through an electronic quote system;

3. The median daily trading volume calculated over the preceding 20 business day period of the security on its listing exchange is either at least 100,000 shares or $500,000 (excluding shares purchased by the computing broker);

4. The aggregate unrestricted market capitalization in shares of the security exceed $500 million over each of the preceding 10 business days.

Note: if a security previously meeting the above conditions no longer does so, the broker is provided with a 5 business day window after which time the security will no longer be deemed readily marketable and must be treated as non-marginable.

Foreign equity securities which do not meet the above conditions, will be treated as non-marginable and will therefore have no loan value. Note that for purposes of this no-action letter foreign equity securities do not include options.

Low Capitalization Stocks

Symbol Description
CQC CUESTA COAL LTD
UNS UNILIFE CORP-CDI
GHC GENERATION HEALTHCARE REIT D
CDG CLEVELAND MINING CO LTD
THR THOR MINING PLC-CDI
CXX CRADLE RESOURCES LTD
MGN MAGELLAN PETROLEUM CORP-CDI
MXQ MAX TRUST
PXS PHARMAXIS LTD
EGG ENERO GROUP LTD
AFR AFRICAN ENERGY RESOURCES-CDI
TTI TRAFFIC TECHNOLOGIES LTD
GID GI DYNAMICS INC-CDI
MLX METALS X LTD
IRI INTEGRATED RESEARCH LIMITED
RCU REAL ESTATE CAPITAL PARTNERS
PAA PHARMAUST LTD
AVQ AXIOM MINING LTD
SUM SUMATRA COPPER & GOLD-CDI
SHC SUNSHINE HEART INC-CDI
MNZ MNEMON LTD
FRC FORTE CONSOLIDATED LTD
RVA REVA MEDICAL INC - CDI
SCD SCANTECH LIMITED
PGI PANTERRA GOLD LTD
AKP AUDIO PIXELS HOLDINGS LTD
KPR KUPANG RESOURCES LTD
WCB WARRNAMBOOL CHEESE & BUTTER
307 UP ENERGY DEVELOPMENT GROUP
8096 RUIFENG PETROLEUM CHEMICAL
3777 CHINA FIBER OPTIC NETWORK SY
396 HING LEE HK HOLDINGS LTD 
8372 RUIFENG PETROLEUM CHEMICAL
8376 GLOBAL ENERGY RESOURCES INT
702 SINO OIL AND GAS HOLDINGS LT
8286 SHANXI CHANGCHENG MICROLIG-H 
3300 CHINA GLASS HOLDINGS LTD
355 CENTURY CITY INTL  
399 UNITED GENE HIGH-TECH GROUP
STRTECH STERLITE TECHNOLOGIES LTD 
INGERRAND INGERSOLL-RAND INDIA LTD
KALPATPOW KALPATARU POWER TRANSMISSION
IBSEC INDIABULLS SECURITIES LTD
RELMEDIA RELIANCE MEDIAWORKS LTD
KENNAMET KENNAMETAL INDIA LIMITED
TBZ TRIBHOVANDAS BHIMJI ZAVERI L
MAHINDFOR MAHINDRA FORGINGS LTD
IVRCLINFR IVRCL LTD
GOLDLEG GOLDEN LEGAND LEASING & FIN
8068 RYOYO ELECTRO CORP
2749 JP-HOLDINGS INC
2169 CDS CO LTD
3278 KENEDIX RESIDENTIAL INVESTME
1934 YURTEC CORP
3433 TOCALO CO LTD
4109 STELLA CHEMIFA CORP
1720 TOKYU CONSTRUCTION CO LTD
4775 SOGO MEDICAL CO LTD
6801 TOKO INC

Low Capitalization Stocks

 

SYMBOL DESCRIPTION
AFAB.B ACANDO AB
ALPA ALPCOT AGRO AB
AOILSDBPR ALLIANCE OIL CO LTD-PREF
ARCM ARCAM AB
EOS EOS RUSSIA
GDWN GOODWIN PLC
IMS1 IMMSI SPA
KDEV KAROLINSKA DEVELOPMENT-B
MSAB.B MICRO SYSTEMATION AB-B
NETI.B NET INSIGHT AB-B
NOMI NORDIC MINES AB
PARE PA RESOURCES AB.
PGD PATAGONIA GOLD PLC
REG RARE EARTHS GLOBAL LTD
RPO RUSPETRO PLC
SHELB SHELTON PETROLEUM AB
SWOL.B SWEDOL AB-B
TAGR TRIGON AGRI A/S
VPP VALIANT PETROLEUM PLC
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