How can I close out the nominal FOREX positions in my account?

When account holders enter into transactions with instruments which are denominated in a non-Base Currency, the resultant profit or loss along with any interest charges (in the event of a margin loan) will remain in the currency in which the product was denominated until such time the account holder acts to close the currency position(s). This responsibility rests with the account holder as closing the position requires acceptance of a conversion price which is likely to be subject to continuous fluctuation similar to any other financial instrument.

There are limited instances in which IBKR will act to close a non-Base Currency position, including the following:

1. In situations where a margin deficiency exists and the position is closed in an effort to restore margin compliance; and

2. If the non-Base Currency balance is deemed to be nominal. Nominal balances are defined as those below USD 5.00, or equivalent.  Such balances are regularly swept once settlement has been completed into the Base Currency as long as no other unsettled activity remains. Note that balances which are accrued but not yet posted, such as interest debits and credits, are not subject to being swept while in an accrual state.

3. If the account equity is deemed to be nominal.  Here, if the account balance is below USD 80.00, or equivalent, the balance consists solely of cash and there has been no trade activity over the prior 10 business days, all non-Base Currency balances will be unwound and converted into the Base Currency. Note that this logic does not apply to accounts managed by a financial advisor or carried on behalf of an introducing broker.

4. If the account has selected the Close Account option in Client Portal.  Here, all non-Base Currency balances not greater than 1,000 USD equivalents will be automatically converted into the Base Currency.

IBKR does provide an expedited process to assist account holders who wish to close all non-Base Currency positions collectively. To use this process, start by clicking on the Account button at the top of the TWS, which opens up a window displaying account balances including cash positions in all denominations. In the section titled 'Market Value - Real FX Balance" right click on any row to from the drop down menu to select the option titled 'Close All Non-Base Currency Positions'. Upon clicking that link, the account holder will be guided through a series of steps which will create a market order to close any non-Base Currency positions.

NOTE: Commissions are charged on FOREX conversions initiated by the account holder but not on those initiated by IBKR for the purpose of closing a nominal balance as noted above. IBKR will charge a commission if the position was liquidated in order to restore margin compliance.

Glossary terms: 

Does IBKR allow FOREX trading in the KRW?

IBKR does not allow clients to open currency positions denominated in the Korean Won (KRW). The currency is listed on the IdealPro and odd lot venues solely for the purpose of closing KRW positions incurred through the trading of KRW denominated KOPSI 200 Index futures and options listed on the Korean Stock Exchange.

Understanding interest charges when the net cash balance is a credit

An account will be subject to interest charges despite maintaining an overall net long or credit cash balance under the following circumstances: 

1. The account maintains a short or debit balance in a given currency.

For example, an account maintaining a net cash credit balance equivalent to USD 5,000 comprised of a long USD balance of 8,000 and a short EUR balance equivalent to USD 3,000 would be subject to an interest debit based upon the short EUR balance.  There would be no offsetting credit on the long USD balance as it is less than the USD 10,000 Tier I level above which interest is earned.  

Account holders should note that in the event they purchase a security which is denominated in a currency that they do not hold in their account, IBKR will create a loan in that currency in order to settle the trade with the clearinghouse. If one wishes to avoid such loans and their associated interest charges, they would need to either deposit funds denominated in that particular currency or convert existing cash balances via the Ideal Pro (for balances of USD 25,000 or above) or odd lot (for balances less than USD 25,000) venue prior to entering into your trade. 

2. The credit balance is comprised  principally of proceeds from the short sale of securities. 

For example, an account maintaining a net cash credit balance of USD 12,000 which is comprised of a USD debit of 6,000 in the security sub-account (less the market value of any short stock positions) and a short stock market value credit of USD 18,000 would be charged interest on the Tier 1 debit of USD 6,000 and would earn no interest on the short stock credit as it falls below the USD 100,000 Tier I level.

3. The credit balance includes unsettled funds.

IBKR determines interest debits and credits solely based upon settled funds. Just as an account holder is not assessed interest charges on funds borrowed to purchase a security until such time that purchase transaction settles, the account holder will not receive an interest credit, or offset against a debit balance, on funds originating from the sale of a security until such time the transaction has settled (and IBKR has been credited funds by the clearinghouse).

 

Can I trade products denominated in a currency other than my Base Currency in an IRA account?

If you have requested an IRA account with margin permissions you may trade products which are denominated in a currency other than that of your designated Base Currency. However, as IRA accounts, by regulation, are not allowed to borrow cash (i.e., have a debit balance in any currency type), you would need to first convert a sufficient amount of your current cash balance into the currency in which the product is denominated prior to entering your order to purchase that product.  This conversion can be transacted on our IdealPro platform if greater than USD 25,000, or equivalent, or the odd lot venue if below USD 25,000.

Why are there two currencies shown when trading forex, and how do they work?

Overview: 

In the international forex cash market (known as the Spot Market) currencies are traded in pairs.  The first currency in each pair is known as the Transaction Currency, while the second currency in the pair is the Settlement Currency.   The quantity bought and sold will apply directly to the Transaction Currency, while the gains and losses from transactions will apply to the Settlement Currency.  When you buy a currency pair you are going long the Transaction Currency while simultaneously shorting the Settlement Currency.  Conversely, when you sell a currency pair you are shorting the Transaction Currency while simultaneously buying the Settlement Currency.  Since the forex market is foreign exchange, each transaction must contain one currency against another.

Background: 

We'll work through an example, using EUR.USD as our currency pair, with 100,000 being the quantity.  In this example, EUR is the Transaction Currency.   USD is the Settlement Currency.  Buying 100,000 EUR.USD would mean that you are going long or buying EUR 100,000, while simultaneously shorting/selling 100,000 EUR worth of USD at the present exchange rate which exists in the interbank market.  If you were to close this position by selling 100,000 EUR.USD, then you would close or go "flat" EUR.USD.  However, any profit or loss on this transaction would settle in USD, since it is the Settlement Currency.  Therefore, you be left with a positive or negative balance in USD as a result of this transaction.  The  inverse would be true if the initiating  trade was a sell of EUR.USD. 

How do I calculate the value of a pip on my forex trades?

The pip (the equivalent of a tick in most other asset classes) value varies depending on the particular currency pair and the amount of cash being traded. The definition of a pip is; the smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point (for most pairs this is the equivalent of 1/100th of one percent, or one basis point). As a result of this, the value of a pip is going to be dependent on the quantity that is being traded. In order to determine the pip value a trader needs to know the following information:

  1. The quantity being traded
  2. The execution price
  3. The price increment

To determine the order's pip value, simply multiply the FX order size by the currency pair's increment. For example, EUR.USD typically trades in increments of 0.0001. If you were to place an order for 100,000 EUR.USD, multiply the order size of 100,000 times the increment of 0.0001. This results in a pip value of USD 10 per pip. For a USD.JPY pair order that has a price increment of .01, the pip value would be JPY 1,000 per pip (USD.JPY 100,000 times 0.01).

Please note, the first currency in an FX pair is the order's transaction currency and the second one is the settlement currency. The pip value is an amount of the settlement currency. For more information, please visit the IBKR Knowledge Base articles for Settlement currency and Transaction currency.

Does IBKR offer trading on Forex products other than futures?

Background: 

Yes, IBKR does offer trading on multiple Forex products.  The most heavily traded market is Forex cash, which is commonly known as the Spot Market.  This is an unregulated, decentralized market that does not have an exchange or standardized contracts.  It is a system of banks and interbank dealers that offer prices (liquidity) for various institutions and individuals to access and trade.  IBKR has access to numerous liquidity providers, including several of the largest in the world, through our IdealPro trading platform.  Since there are no standardized contracts in the Forex cash market, traders can place orders for various cash amounts, provided they use only whole numbers.  The minimum order size to access the Ideal Pro system is USD 25,000 or the equivalent in other currencies.   

IBKR also offers trading in Forex futures and options as well as a number of currency related products listed on the US securities option markets.

Can I convert a long cash balance to a non-base currency or trade a position denominated in a non-base currency in my cash account?

Overview: 

Yes, albeit, with certain limitations.  IBKR provides cash accounts the ability to trade products denominated in a currency other than the designated base currency of the account as long as the account is classified as a multi-currency cash account (i.e., maintains Forex trading permissions).  To trade a security denominated in a non-base currency, the account holder must either first deposit the appropriate currency into their account or perform a currency conversion via the IdealPro venue.  Regardless of the method selected, one needs to ensure that a sufficient balance of the appropriate currency exists in order to cover the purchase price of the applicable security including commissions prior to submitting the order or it will be rejected. This implies that IdealPro currency conversions must settle prior to the converted funds being available for a subsequent transaction (e.g., if you are converting USD into EUR for the purpose of purchasing a EUR denominated stock, you would not be able to enter the stock order until the conversion trade had settled two business days later).

Individuals trading futures in a cash account should note that futures variation is settled in cash and any variation which serves to generate a cash deficit in any given currency type (i.e. variation exceeds available cash margin) will result in a forced position liquidation in an amount sufficient to eliminate the cash deficit.

Finally, note that cash accounts are restricted from holding a short balance in any non-base currency as this would constitute a margin loan.  In addition, clients of IB India are not allowed to maintain a multi-currency cash account and may only maintain assets which are denominated in INR.

What does the Cash FX Translation Gain/Loss line on my Daily Activity Statement represent and how is it calculated?

Overview: 

In order to provide a comprehensive snapshot of your account equity for statement generation purposes, any long or short cash balance in your account which is denominated in a currency other than that which you have designated as your Base Currency must be converted at the then prevailing exchange rate. As exchange rates tend to vary from one period to another, this conversion process is likely to result in a Cash FX Translation balance that is either positive (i.e., a gain) or negative (i.e., a loss).  It should be noted that these gains or losses represent a mark to market calculation (i.e., as if all non-Base Currency balances had been closed out at the end of day exchange rate) and the actual gain or loss, if any, cannot be determined until such time the non-Base Currency balance has been closed. 

The Cash FX Translation Gain/Loss for any given non-Base Currency is determined by first calculating the difference between the Base Currency exchange rates as of the current and prior daily statement periods (exchange rateC – exchange rateP , where rates are made available in the Base Currency Exchange Rate section of each statement;). This difference, positive or negative, is then multiplied by the Starting Cash balance for the current statement period to determine the Cash FX Translation gain (if positive) or loss (if negative).  As all other non-Base Currency details (e.g., net trade sales and purchases, commissions, interest, etc.) are booked as of the end of day for currency translation purposes, they have, by definition, no translation gain or loss.

Glossary terms: 

Why does the Cash Report section of my statement reflect a reduction in cash despite no trade activity or withdrawals?

Overview: 

 

The Cash Report section details how each period's cash balance changes from beginning to end. If your account holds a long or short balance in a non-base currency, such balances will be translated (but not converted) into your base currency for statement reporting and account equity aggregation purposes. The rates at which these non-base balances have been converted are detailed in the Exchange Rates section located towards the bottom of your Daily Activity Statement. All other things being equal, any change in an exchange rate from one statement period to another will result in either an increase or decrease in your ending cash balance with the net change across all non-Base currencies being reflected in the Cash FX Translation Gain/Loss line. This does not reflect a realized gain or loss on these open currency positions but rather a mark-to-market calculation across statement periods.

Glossary terms: 
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