Overview of Dodd-Frank

Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd-Frank, is a U.S. law enacted in July of 2010, the purpose of which is to prevent the recurrence of events which lead to the 2008 financial crisis. Its principal goals are to:

- Promote U.S. financial stability by improving accountability and transparency within the financial system;
- Protect taxpayers from future bailouts of institutions deemed “too big to fail”; and
- Protect consumers from financial services practices considered abusive.

For additional information, please review the following sections:
- Dodd-Frank reforms
- Dodd-Frank and your IB Account

 

 

 

 

 

Dodd-Frank Reforms
To accomplish its goals, Dodd-Frank proposed the following reforms:

- Enhanced oversight and supervision of financial institutions through the creation of Financial Stability Oversight Council
- Creation of a new agency responsible for implementing and enforcing compliance with consumer financial laws (Bureau of Consumer Financial Protection)
- Implementation of more stringent regulatory capital requirements
- Changes in the regulation of over the counter derivatives including restrictions upon access to Federal credit by swaps entities, establishment of regulatory oversight and mandatory trading and clearing requirements
- Enhanced regulation of credit rating agencies intended to eliminate exemptions from liability, enhance rating agency disclosure, establish prohibited activities and impose standards for independent Board governance
- Changes to corporate governance and executive compensation practices
- Incorporation of the Volcker Rule which imposes restrictions upon the speculative proprietary trading activities of banking entities
- Mandating studies intended to reform investor protection rules
- Changes to the securitization market including requirements that mortgage bankers retain a % of risky loans.

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Dodd-Frank and Your IB Account
Perhaps most visible to IB account holders of all the Dodd-Frank regulations are those relating to money transfers. Here, Section 1073 of the Act introduces consumer protections designed to increase transparency with respect to the costs, timing and the right to repudiate cross-border transactions.
For purpose of Section 1073, a cross-border transaction is defined as an electronic transfer of money from a consumer in the United States to a person or business in a foreign country. As IB LLC is a U.S. based broker, all its account holders regardless of whether they are domiciled in the U.S. or not, benefit from this protection and it covers withdrawals denominated in a currency other than the U.S. dollar as well as USD denominated withdrawals sent to a non-U.S. bank. Account holders submitting a withdrawal which is covered by this regulation will be provided with a disclosure after confirming the request within Account Management. This disclosure will include the following information:

- The name and address of the sender and recipient
- The amount to be deducted from the sender’s IB account
- The amount projected to be credited to the recipient’s bank account including an estimate of fees which the receiving bank's correspondent bank(s) may charge. Note that these correspondent bank fees are not set by nor is any part of them earned by IB.
- A disclaimer that additional fees and foreign taxes may apply.
- Notice of the sender’s right to cancel the transfer request for a full refund within 30 minutes of it being authorized.
- Regulatory contact information in the event of questions or complaints.

When estimating correspondent bank transfer fees, IB takes into consideration information collected from past customer transactions in addition to data made available by our agent banks. We encourage our customers to review and consider this information when making decisions regarding cross-border transactions.

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Information Regarding Italian Financial Transaction Tax on Derivatives

Overview: 

This document is designed to provide an overview of how the Italian Financial Transaction Tax (I-FTT) will be handled by Interactive Brokers for Italian derivatives.

Effective September 1, 2013, the tax will be implemented on the purchase and sale of Italian derivatives.

Tax Rate

The tax rate is dependent on the type of financial instrument traded, whether the instrument was traded OTC or on a regulated exchange or MTF and on the value of the contract. The tax is applied per contract.

Scope

The I-FTT will be applied to transactions on derivatives whose underlying assets are mainly I-FTT taxable shares or whole value depends mainly on I-FTT taxable shares. It will also be applied on any other financial instrument which allows the purchase or share of I-FTT taxable shares or involving a cash settlement determined with reference to I-FTT taxable shares.

Calculation Method

The I-FTT will be applied to both the purchaser and the seller of the derivative contract. As such, there is no benefit of netting as there is when trading stocks.

The rates as set for 2013 when trading on a regulated exchange or MTF are outlined below. Note that a transaction occurring OTC will be charged 5 times the rates displayed below. The values displayed below are in EUR.

 

 

Instrument

Value < 2,500

2,500 to 4,999 5,000 to 9,999 10,000 to 49,999 50,000 to 99,999 100,000 to 499,999 500,000 to 999,999 1,000,000 +
Futures, certificates, covered warrants, options on yields, measures or indices related to shares  0.00375  0.0075  0.015  0.075  0.15  0.75  1.5  3
Futures, warrants, certificates, covered warrants and options on shares  0.025  0.05  0.1  0.5  1  5 10  20
All other products not listed above  0.05 0.1 0.2 1  2  10  20  40

 

The information above is being provided on a best efforts basis only and is subject to change.

Security Device Replacement Charge

Account holders logging into their account via IB's Secure Login System are issued a security device, which provides an additional layer of protection to that afforded by the user name and password, and which is intended to prevent on-line hackers and other unauthorized individuals from accessing their account. While IB does not charge any fee for the use of the device, certain versions require that the account holder return the device upon account closing or incur a replacement fee.  Existing account holders are also subject to this replacement fee in the event their device is lost, stolen or damaged (note that there is no fee to replace a device returned as a result of battery failure). 

In addition, while IB does not assess a replacement fee unless a determination has been made that the device has been lost, stolen, damaged or not returned, a reserve equal to the fee will placed upon the account upon issuance of the device to secure its return.  This reserve will have no effect upon the equity of the account available for trading, but will act as limit to full withdrawals or transfers until such time the device is returned (i.e., cannot withdraw the reserve balance).

Outlined below are the replacement fee associated with each device.

SECURITY DEVICE REPLACEMENT FEE
Security Code Card $0.001
Digital Security Card    $20.00 
Alpine Device $0.002
Digital Security Card + $20.00 
Gold Device $150.00 
Platinum Device $150.00 

For instructions regarding the return of security devices, please see KB975

 

1The Security Code Card is not required to be returned upon account closing and may be destroyed and discarded once remaining funds have been returned and the account has been fully closed. Access to Account Management after closure for purposes of viewing and retrieving activity statements and tax documents is maintained using solely the existing user name and password combination.

2IB is no longer issuing replacement Alpine Devices and account holders using this device have been issued notice and instructions within Account Management for requesting a replacement. Please contact your local Customer Service Center in the event you maintain this device and have yet to receive its replacement.

Why Do Commission Charges on U.S. Options Vary?

IB's option commission charge consists of two parts:

1. The execution fee which accrues to IB.  For Smart Routed orders this fee is set at $0.70 per contract, reduced to as low as $0.15 per contract for orders in excess of 100,000 contracts in a given month (see website for costs on Direct Routed orders, reduced rates on low premium options and minimum order charges); and 

2. Third party exchange, regulatory and/or transaction fees.

In the case of third party fees, certain U.S. option exchanges maintain a liquidity fee/rebate structure which, when aggregated with the IB execution fee and any other regulatory and/or transaction fees, may result in an overall per contract commission charge that varies from one order to another.  This is attributable to the exchange portion of the calculation, the result of which may be a payment to the customer rather than a fee, and which depends upon a number of factors outside of IB's control including the customer's order attributes and the prevailing bid-ask quotes.

Exchanges which operate under this liquidity fee/rebate model charge a fee for orders which serve to remove liquidity (i.e., marketable orders) and provide a credit for orders which add liquidity (i.e., limit orders which are not marketable). Fees can vary by exchange, customer type (e.g., public, broker-dealer, firm, market maker, professional), and option underlying with public customer rebates (credits) generally ranging from $0.10 - $0.42 and public customer fees from $0.15 - $0.50. 

IB is obligated to route marketable option orders to the exchange providing the best execution price and the Smart Router takes into consideration liquidity removal fees when determining which exchange to route the order to when the inside market is shared by multiple (i.e., will route the order to the exchange with the lowest or no fee).  Accordingly, the Smart Router will only route a market order to an exchange which charges a higher fee if they can better the market by at least $0.01 (which, given the standard option multiplier of 100 would result in price improvement of $1.00 which is greater than the largest liquidity removal fee).

For additional information on the concept of adding/removing liquidity, including examples, please refer to KB201.

Overview of SEC Fees

Under Section 31 of the Securities Exchange Act of 1934, U.S. national securities exchanges are obligated to pay transaction fees to the SEC based on the volume of securities that are sold on their markets. Exchange rules require their broker-dealer members to pay a share of these fees who, in turn, pass the responsibility of paying the fees to their customers.

This fee is intended to allow the SEC to recover costs associated with its supervision and regulation of the U.S. securities markets and securities professionals. It applies to stocks, options and single stock futures (on a round turn basis); however, IB does not pass on the fee in the case of single stock futures trades.  Note that this fee is assessed only to the sale side of security transactions, thereby applying to the grantor of an option (fee based upon the option premium received at time of sale) and the exerciser of a put or call assignee (fee based upon option strike price).

For the fiscal year 2014 the fee was assessed at a rate of $0.0000221 per $1.00 of sales proceeds, however, the rate is subject to annual and,in some cases, mid-year adjustments should realized transaction volume generate fees sufficiently below or in excess of targeted funding levels.1

Examples of the transactions impacted by this fee and sample calculations are outlined in the table below.

Transaction

Subject to Fee?

Example

Calculation

Stock Purchase

No

N/A

N/A

Stock Sale (cost plus commission option)

Yes

Sell 1,000 shares MSFT@ $25.87

$0.0000221 * $25.87 * 1,000 = $0.571727

Call Purchase

No

N/A

N/A

Put Purchase

No

N/A

N/A

Call Sale

Yes

Sell 10 MSFT June ’11 $25 calls @ $1.17

$0.0000221 * $1.17 * 100 * 10 = $0.025857

Put Sale

Yes

Sell 10 MSFT June ’11 $25 puts @ $0.41

$0.0000221 * $0.41 * 100 * 10 = $0.009061

Call Exercise

No

N/A

N/A

Put Exercise

Yes

Exercise of 10 MSFT June ’11 $25 puts

$0.0000221 * $25.00 * 100 * 10 = $0.5525

Call Assignment

Yes

Assignment of 10 MSFT June ’11 $25 calls

$0.0000221 * $25.00 * 100 * 10 = $0.5525

Put Assignment

No

N/A

N/A

 

1Information regarding current Section 31 fees may be found on the SEC's Frequently Requested Documents page located at: http://www.sec.gov/divisions/marketreg/mrfreqreq.shtml#feerate

 

 

Overview of Fees

Clients and as well as prospective clients are encouraged to review our website where fees are outlined in detail. An overview of the most common fees is provided below:

 

1. Commissions - vary by product type and listing exchange and whether you elect a bundled (all in) or unbundled plan. In the case of US stocks, for example, we charge $0.005 per share with a minimum per trade of $1.00.


2. Interest - interest is charged on margin debit balances and IB uses internationally recognized benchmarks on overnight deposits as a basis for determining interest rates. We then apply a spread around the benchmark interest rate (“BM”) in tiers, such that larger cash balances receive increasingly better rates, to determine an effective rate.  For example, in the case of USD denominated loans, the benchmark rate is the Fed Funds effective rate and a spread of 1.5% is added to the benchmark for balances up to $100,000.  In addition, individuals who short stock should be aware of special fees expressed in terms of daily interest where the stock borrowed to cover the short stock sale is considered 'hard-to-borrow'. 

 3. Exchange Fees - again vary by product type and exchange. For example, in the case of US securities options, certain exchanges charge a fee for removing liquidity (market order or marketable limit order) and provide payments for orders which add liquidity (limit order). In addition, many exchanges charge fees for orders which are canceled or modified.



4. Market Data - you are not required to subscribe to market data through IB but if you do you may incur a monthly fee which is dependent upon the vendor exchange and their subscription offering. We provide a Market Data Assistant tool which assists in selecting the appropriate market data subscription service available based upon the product you wish to trade. To access, log into Account Management click on the Tools icon and then the IB Market Data Assistant link.



5. Minimum Monthly Activity Fee - as we cater to active traders we require accounts to generate a minimum in commissions each month or be charged the difference as an activity fee. The minimum is $10 per month for accounts maintaining a balance above $2,000 and $20 per month for accounts whose equity has fallen below $2,000.



6. Miscellaneous - IB allows for one free withdrawal per month and charges a fee for each subsequent withdrawal. In addition, there are certain pass-through fees for trade bust requests, options and futures exercise & assignments and ADR custodian fees.



For additional information, we recommend visiting our website at ww.interactivebrokers.com and from the Individuals page select the Fees menu option at the top of the page.

 

Priority or Professional Customer Orders

In the 4th quarter of 2009, certain U.S. option exchanges (CBOE, ISE) implemented rules which serve to distinguish orders originating from a group of public customers deemed to be "Professional" (i.e., persons or entities having access to information and/or technology which enables them to trade in a manner as a broker dealer) as opposed to retail.  In accordance with these rules, any customer account which is not a broker dealer and which places more than 390 listed option orders (whether executed or not) on a daily average across all option exchanges in a given month for its own beneficial account(s) will be classified as Professional.

 

Orders submitted on behalf of Professional customers to these option exchanges will be treated the same as broker dealers for purposes of execution priority and will be subject to a per contract transaction fee ranging from $0.20 to $0.85 (depending upon the class of options). 

Brokers are required to conduct a review on a calendar quarter basis to identify those customers who have exceeded the 390 contract threshold for any month in that quarter and who are to be designated as Professional for the next calendar quarter. Customers impacted by these rules will be notified by IB.  In addition, IB's Smart order router is designed to take these new exchange fees into consideration when making routing decisions.

For additional details, please see the following links:

ISE Regulatory Circular 2009-179

CBOE Regulatory Circular RG09-148

Handling procedures for fractional fees

It should be noted that certain exchange fees as well as IB commission rates are established at levels beneath  that of the smallest increment by which a given currency is defined (e.g. $0.01 in the case of the USD).  In the event a customer incurs a fee having an extended value below this minimum increment, the fee will be calculated at its extended value and then rounded up or down to the nearest whole minimum increment of that currency.   

This rounding process may result in occurrences where the aggregate rounded commission charge as reflected in the cash balance section of the Activity Statement on a given day is $0.01 higher than the sum of the rounded charge reflected on a line ietm basis in the trades section. An example of this may occur for a sample series of option trades for a given day is provided below. 

EXAMPLE:

Action Calculated Fee (extended) Statement - Trades  Section (rounded at a line item level) Statement - Cash Balance Section (rounded at an aggregate level)
Customer buys one U.S. securities option, incurring a minimum commission charge of $1.00 plus an exchange Option Regulatory Fee of $0.014 $1.014 $1.01 N/A
Customer buys one U.S. securities option, incurring a minimum commission charge of $1.00 plus an exchange Option Regulatory Fee of $0.014 $1.014 $1.01 N/A
Totals $2.028 $2.02 $2.03

 

 

 

How do I determine which market data subscription is applicable for a given security?

IB provides account holders with a Market Data Assistant tool which assists in selecting the appropriate market data subscription service available for the security (stock, option or warrant) they wish to trade.  The search results show all exchanges upon which the product trades, the subscription offering and its monthly fee for both Professional and Non-Professional designated clients as well as the depth of market variations associated with each subscription.

To access, log into Account Management click on the Tools icon and then the IB Market Data Assistant link. From there you may search by entering any one of the following security product identifiers: Symbol, ISIN or CUSIP. Results may be further filtered by specifying the exchange, Professional or Non-Professional designation and/or the security's currency of denomination.

This tool may also be accessed through Account Management within the page where current market data subscriptions are displayed and where new election may be made. To view here, select the Trading Access and then Market Data Subscription menu options. A link to the Market Data Assistant tool is provided in the upper-right hand corner of this subscription page.

Glossary terms: 

ADR pass-through fees

Account holders maintaining positions in American Depository Receipts (ADRs) should note that such securities are subject to periodic fees intended to compensate the agent bank providing custodial services on behalf of the ADR.  These services typically, include inventorying the foreign stocks underlying the ADR and managing all registration, compliance and record-keeping services.

Historically, the agent banks were only able to collect the custody fees by subtracting them from the ADR dividend, however, as many ADRs do not regularly pay dividends, these banks have been unable to collect their fees.  As a result, in 2009, the Depository Trust Company (DTC) received SEC approval to begin collecting these custody fees on behalf of the banks for ADRs which do not pay periodic dividends.  DTC collects these fees from its participant brokers (such as IB) who hold the ADRs for their clients.  These fees are referred to as pass-through fees as they are designed to be then collected by the broker from its clients.

If you hold a position in a dividend paying ADR, these fees will be deducted from the dividend as they have in the past.  If you hold a position in an ADR which does not pay a dividend, this pass-through fee will be reflected on the monthly statement of the record date in which it is assessed.  Similar to the treatment of cash dividends, IB will attempt to reflect upcoming ADR fee allocations within the Accruals section of the account statements as well. Once charged, the fee will be reflected in the Deposits & Withdrawals section of the statement with the description 'Adjustments - Other' along with the symbol of the particular ADR it is associated with.

While the amount of this fee will generally range from $0.01 - $0.03 per share, the amounts may differ by ADR and it is recommended that you refer to your ADR prospectus for specific information.  An on-line search for the prospectus may be conducted through the SEC's EDGAR Company Search tool.

Glossary terms: 
ADR
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