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.

IB Stock Yield Enhancement Program

PROGRAM OVERVIEW

The Stock Yield Enhancement Program (SYEP) offers participants the opportunity to earn additional income on their full-paid shares by lending those shares to IB in exchange for a portion of the fees short sellers are willing to pay to borrow them.  Upon enrollment, Program activities are managed in their entirety by IB and require no actions on the part of participants.  These activities include the following:

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

- Establishment of loans and returns;

- Crediting of loan fee income (expressed as an interest accrual for activity statement reporting purposes); and

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

In contrast to the securities lending programs offered by others, IB provides complete transparency as to the market rate and gross fees earned from each transaction which will be split equally between the client and IB.

 

HOW IT WORKS

- Clients may enroll in the Program by logging into Account Management and selecting the Trading Access and then Trading Configuration menu options and then checking the box marked Stock Yield Enhancement Program.  Activation generally takes place overnight. Eligible accounts include any IB LLC or IB UK margin accounts and IB LLC or IB UK cash accounts with equity in excess of USD 50,000.

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

- At the end of each day that any loan is in place, the client will receive a payment presented as an interest accrual which is credited to equity and which represents 1/2 of gross lending fee charged to the end borrower.  The remaining 1/2 accrues to IB as compensation for managing the loan. The details regarding the transaction, including the quantity of shares loaned, collateral amount, market fee rate, gross fee, IB management charge and net fee are reflected on the daily activity statement.

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

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

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

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

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

          * Cost basis

 

SPECIAL CONSIDERATIONS

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

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

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

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

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

 

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

 

Stock Yield Enhancement Program FAQs

What is the purpose of the Stock Yield Enhancement Program?
The Stock Yield Enhancement program provides customers with the opportunity to earn additional income on securities positions which would otherwise be segregated (i.e., fully-paid and excess margin securities) by permitting IB to lend out those securities to third parties. Customers who participate in the program will receive 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.

 

India Intra-Day Shorting Risk Disclosure

Interactive Brokers currently offers the ability to short sell stocks before taking delivery on an intra-day basis. In accordance with IB’s intra-day shorting rules, traders are required to deliver shares sold or close short stock positions prior to the end of the trading session. 

Should traders establish a short stock position intra-day and still hold the position ten minutes prior to the end of the trading session at 15:20 IST, Interactive Brokers may, on a best efforts basis, close the position on your behalf. If the position is not closed by the end of the day and the shares are not delivered by the customer before settlement, the loss on account of auction will be borne by the customer. Please note that prices in the auction market are highly variable and typically not favorable compared to the normal market.

It is important to note, IB will not take into consideration any closing orders for short stock positions placed by the customer which may still be working. If your account holds a short position ten minutes prior to the end of the trading session and you have placed working orders to close those positions, there is the possibility your closing order will execute and that IB will act to close out your short position.  In this situation you will be responsible for both executions and will need to manage your long position accordingly.

A fee of INR 1,500 will be charged for this manual processing in addition to any external penalties in the case of short stock positions resulting in auction trades.  As such, we strongly urge customers to monitor their positions and take appropriate action themselves in order to avoid this.

The Short Stock Availability Tool

How to use the Short Stock Availability Tool

When I short a stock, when will the hard to borrow interest begin accruing?

Overview: 

Many shorted stocks will have a hard to borrow interest fee associated with them. 

The hard to borrow interest will begin being charged on a short stock position on the settlement date.  When the position is closed, the interest fees will be assessed until the settlement date of the closing transaction.  For example, you sell XYZ on Monday, and you close the position on Tuesday.  The interest fee would not be charged until Thursday, and your account would only be charged for one day of hard to borrow fees. 

Why do I receive a notice of a potential buy-in of my short position when your Short Stock Availability List is showing shares available to borrow?

As background, the short stock availability list represents the inventory of shares which IB has available to lend and which other brokers have indicated that they have available to lend. While it is updated on a near real-time basis throughout the day for changes to IB's inventory and periodically throughout the day to reflect updates to the availability lists of other brokers, many brokers provide updates only once per day.



It should be noted that the purpose of the short stock availability list is to meet the broker's regulatory obligation that they have made a reasonable determination that a security can be borrowed in time for settlement three business days later. There is no regulatory requirement, in most instances, that the broker pre-borrow shares to effect delivery on a short sale prior to settlement and the requirement which this list serves to address is completely separate from the SEC rules which require that the broker force-close any short position having a delivery obligation subject to fail with the clearinghouse on any given day.



It is these rules which we are adhering to when we review your short positions relative to our settlement obligations with the clearinghouse each day. While the shares necessary to cover your short sale may have been available as of the date your trade took place and subsequently thereafter, there can be no assurance that those shares can be borrowed indefinitely. The inventory of available shares to borrow is dynamic and subject to change throughout a given day. When we believe that there is a reasonable chance that we will not be able to maintain your borrow position on a particular day, we will make every effort to provide you with a notice of those short positions which are likely to be bought in absent preemptive action on your part.

Overview of Regulation SHO

 

Regulation SHO, adopted by the SEC in January 2005, sets forth the regulatory framework governing short sales.  Two key provisions, intended to address problems associated with persistent fails to deliver and potentially abusive naked short selling, involve locate and close-out requirements.

 

Under the locate requirement, a broker-dealer must have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the delivery due date before effecting a short sale order.  

 

The close-out requirement requires that the clearing broker take immediate action to close out a fail to deliver position in a threshold security that has persisted for 13 consecutive settlement days by purchasing securities of like kind and quantity. Until the position is closed out, the broker may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security (known as the "pre-borrowing" requirement)

 

IMPORTANT NOTE:

In October 2008, the SEC amended Regulation SHO with temporary Rule 204T (in place until July 31, 2009) which requires that any broker having a fail to deliver position at NSCC on the settlement date immediately borrow or purchase securities to close out the amount of the fail to deliver position by no later than the beginning of regular trading hours on the following settlement date (the “Close-Out Date”). This close-out requirement requires that the broker take affirmative action to purchase or borrow securities and not offset the fail to deliver position with shares it will receive on the Close-Out Date. Rule 204T applies to all securities not just threshold securities.

Glossary terms: 

I have an open order to sell short stock that should have been executed, but it is still on my TWS and not being filled.

Overview: 

When traders attempt to sell short a stock which IB does not currently have in inventory to loan them, IB will look for these shares “on the street”, which means from other brokerage firms.  This search is conducted on a best-efforts only basis.  While IB searches for the shares, the order status box on the TWS Order Management page should be dark green, and will show a small icon of a pair of binoculars, which indicates we are searching.  In the WebTrader, there are no status colors or icons.  The order will simply not execute as IB searches for the shares on the street.

How do I sell a stock short?

Procedurally, to sell short, all you need to do is specify your order Action as 'Sell' at the point you create your order. Note that we do not allow you to be both long and short the same security, so if you maintain a long position and enter a sell order, you will close out any long positions to the extent of your sell order and open a short position to the extent, if any, your sell order exceeds a long position. Also note, that in addition to your account having sufficient equity to meet the margin requirement associated with the transaction, IB is required to meet its regulatory obligation of making a reasonable determination that we can locate the stock for borrowing purposes when the transaction settles (typically T+3). If we are unable to locate the stock based upon our inventory and the availability lists provided to us by other brokers, you will see an Order Status color in the TWS Shortable column of dark green. This indicates that there are no shares available to sell at the moment and that the system is searching for shares. The order will remain in this status until the we are able to locate the shares or the time which you specify for your order to remain in force expires, whichever occurs first. You may wish to review the Shortable Stocks link to our website below which provides a listing of stocks available for shorting. A list of shortable stocks searchable by symbol or CUSIP along with their indicative borrow rates may be found through the Short Stock Availability Tool accessible through the Tools link within Account Management. Finally, you should be aware that one of the risks of borrowing stock to support your short sale is being bought in with little or no notice. Even though a reasonable determination that the shares can be borrowed will be made prior to effecting your sale transaction, there is no assurance that those shares will actually be available at the time of settlement or any day thereafter. The supply and demand of borrowable inventory for any given security is dynamic by nature and regulations require brokers to force-close any short position having a delivery obligation subject to fail with the clearinghouse on any given day. We will make every effort to provide you with advance notice if this appears to be the case in order to provide you with the opportunity to buy in your own position, however, this is done on a best-efforts basis. Other risks to keep in mind are the special charges which tend to be associated with hard-to-borrow securities that, in aggregate may exceed any rebate or interest paid on the short stock proceeds, as well as your obligation to pay to the lender any dividends which are paid throughout the duration of the loan period.
Syndicate content