Order Preview - Check Exposure Fee Impact

IB provides a feature which allows account holders to check what impact, if any, an order will have upon the projected Exposure Fee. The feature is intended to be used prior to submitting the order to provide advance notice as to the fee and allow for changes to be made to the order prior to submission in order to minimize or eliminate the fee.

The feature is enabled by right-clicking on the order line at which point the Order Preview window will open. This window will contain a link titled "Check Exposure Fee Impact" (see red highlighted box in Exhibit I below).

Exhibit I

 

 

Clicking the link will expand the window and display the Exposure fee, if any, associated with the existing positions, the change in the fee were the order to be executed, and the total resultant fee upon order execution (see red highlighted box in Exhibit II below).  Account holders may simply close the window without transmitting the order if the fee impact is determined to be excessive.

Exhibit II

 

Please see KB2275 for information regarding the use of IB's Risk Navigator for managing and projecting the Exposure Fee.

Using Risk Navigator to Project Exposure Fees

The Risk Navigator offers traders the benefit of using our custom scenario feature, which will help accounts determine their overall exposure, based on theoretically price movements in the underlying asset(s). The steps outlined below will allow the trader to create an editable, hypothetical “What – If” portfolio to see how your overall exposure might change based on changes you make to your portfolio, such as adding, closing, or hedging positions.   

Open a new “What-if” portfolio
To create a “What-If” customer scenario from the Classic TWS trading platform 
(1)    On the Analytical Tools menu select Risk Navigator, and select Open New What-If

 

(2)    Specify whether or not you want to base the custom scenario on your existing portfolio
a.       If yes, all your current positions will download to the new “What-If”

b.       If no, you will see a new “What – If” Portfolio with no positions
  
 
You can elect to modify the variables that affect your risk profile using the Custom scenario command on the View menu
(3)    From the View menu select Custom Scenario

 

(4)    To determine the trading account(s) exposure for all the equity positions within your “what-if” portfolio, select ALL UNDERLYINGS to affect all of equity positions with the portfolio.
 
(5)    In the Underlying Price section, define the value of the price change (e.g. -30%, -20%, +10%, or +20%)
 
a.       Chg% à Adds or subtracts the percent of the value in the price field, depending on the sign. For example, if the Price of SPY is 205.37 and you enter -30%, the Custom Scenario price for SPY will be 143.76.   The values in the Custom Scenario are always compared to values in the real-time Market Scenario 
 
(6)    Hit Apply at the top left of the Scenario Editor to see the impact of your changes in the Custom Scenario section

 

To determine the exposure of an account you will need to review the PnL Graph
(7)    The Portfolio PnL Graph illustrates how the total value of your portfolio will change, based on a percent change in the price(s) of the underlying(s). The graph below shows the portfolio relative PnL for an equity portfolio, based on the -30% - +30% price change on ALL UNDERLYINGS.
 
(8)    The account exposure for this equity position can be determined by comparing the worst case loss within a -30% and +20% price scenarios, and then comparing that figure to your net liquidation value. If your estimated PnL is greater than your Net Liquidation Value, then your trading account has exposure.
a.       Using the figures from the above mentioned screen-shots.
                                                               i.      Net Liquidation Value = 207,600,335
                                                             ii.      PnL at -30% price scenario = -300,000,000
                                                            iii.      Exposure = 92,399,665 (207,600,335 - 300,000,000)

Please see KB2276 for information on checking Exposure Fee impact at the point of order preview.

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?

Margin Requirement on Leveraged ETF Products

Leveraged Exchange Traded Funds (ETFs) are a subset of general ETFs and are intended to generate performance in multiples of that of the underlying index or benchmark (e.g. 200%, 300% or greater). In addition certain of these ETFs seek to a generate performance which is not only a multiple of but also the inverse of the underlying index or benchmark (e.g., a short ETF). To accomplish this, these leveraged funds typically include among their holdings derivative instruments such as options, futures or swaps which are intended to provide the desired leverage and/or inverse performance. 

Exchange margin rules seek to recognize the additional leverage and risk associated with these instruments by establishing a margin rate which is commensurate with that level of leverage (but not to exceed 100% of the ETF value). Thus, for example, whereas the base strategy-based maintenance margin requirement for a non-leveraged long ETF is set at 25% and a short non-leveraged ETF at 30%, examples of the maintenance margin change for leveraged ETFs are as follows:

1. Long an ETF having a 200% leverage factor: 50% (= 2 x 25%) 

2. Short an ETF having a 300% leverage factor: 90% (= 3 x 30%) 

A similar scaling in margin is also in effect for options. For example, the Reg. T maintenance margin requirement for a non-leveraged, short broad based ETF index option is 100% of the option premium plus 15% of the ETF market value, less any out-of-the-money amount (to a minimum of 10% of ETF market value in the case of calls and 10% of the option strike price in the case of puts). In the case where the option underlying is a leveraged ETF, however, the 15% rate is increased by the leverage factor of the ETF. 

In the case of portfolio margin accounts, the effect is similar, with the scan ranges by which the leveraged ETF positions are stress tested increasing by the ETF leverage factor.  See NASD Rule 2520 and NYSE Rule 431 for further details.

What happens if the net liquidating equity in my Portfolio Margining account falls below USD 100,000?

Overview: 

Portfolio Margining accounts reporting net liquidating equity below USD 100,000 are limited to entering trades which serve solely to reduce the margin requirement until such time as either: 1) the equity increases to above 100,000 or 2) the account holder requests a downgrade to Reg T style margining through Account Management (select the Trading Access and then trading Configuration menu options).

If a Portfolio Margining eligible account reporting net liquidating equity below USD 100,000 enters an order which, if executed, would serve to increase the margin requirement, the following TWS message will be displayed: "Your order is not accepted, margin requirement increase not allowed. Equity with loan value is less than 100,000.00 USD." 

IMPORTANT NOTICE

Please note that requests to downgrade to reg T will become effective the following business day if submitted prior to 4:00 ET.  Also note that as the Reg T margining methodology generally affords less leverage than does Portfolio Margining, requesting a downgrade may lead to the automatic liquidation of positions in your account in order to comply with Reg T.  You will receive a warning message if that is the case at the time you request the downgrade.

What positions are eligible for Portfolio Margining?

Overview: 

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

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

Overview: 

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

Portfolio margining may be requested through the on-line application phase (in the Account Configuration step)  or after the account has been approved. To apply once the account has already been approved, log into Account Management and select the Trading Access and then Trading Configuration menu items. There you may choose the portfolio margin treatment which will initiate the approval process.  Please note that requests are subject  to review  (generally a 1-2 day process) and may be declined for  various reasons  including a  projected increase  in margin  upon upgrade  from Reg T to Portfolio Margining.  Also note that accounts approved for portfolio margining but maintaining net liquidating equity below the USD 100,000 threshold will remain subject to Reg T margining and not have portfolio margining applied until such time the net liquidating value of the account exceeds USD 100,000.


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