Margin Treatment for Foreign Stocks Carried by a U.S. Broker
As a U.S. broker-dealer registered with the Securities & Exchange Commission (SEC) for the purpose of facilitating customer securities transactions, IB LLC is subject to various regulations relating to the extension of credit and margining of those transactions. In the case of foreign equity securities (i.e., non-U.S. issuer), Reg T. allows a U.S. broker to extend margin credit to those which either appear on the Federal Reserve Board's periodically published List of Foreign Margin Stocks, or are deemed to have a have a "ready market" under SEC Rule 15c3-1 or SEC no-action letter.
Prior to November 2012, "ready market" was deemed to include equity securities of a foreign issuer that are listed on what is now known as the FTSE World Index. This definition was based upon a 1993 SEC no-action letter and was premised upon the fact that, while there may not have been a ready market for such securities within the U.S., the securities could be readily resold in the applicable foreign market. In November of 2012, the SEC issued a follow-up no-action letter (www.sec.gov/divisions/marketreg/mr-noaction/2012/finra-112812.pdf) which expanded the population of foreign equity securities deemed to have a ready market to also include those not listed on the FTSE World Index provided that the following four conditions are met:
1. The security is listed on a foreign exchange located within a FTSE World Index recognized country, where the security has been trading on the exchange for at least 90 days;
2. Daily bid, ask and last quotations for the security as provided by the foreign listing exchange are made continuously available to the U.S. broker through an electronic quote system;
3. The median daily trading volume calculated over the preceding 20 business day period of the security on its listing exchange is either at least 100,000 shares or $500,000 (excluding shares purchased by the computing broker);
4. The aggregate unrestricted market capitalization in shares of the security exceed $500 million over each of the preceding 10 business days.
Note: if a security previously meeting the above conditions no longer does so, the broker is provided with a 5 business day window after which time the security will no longer be deemed readily marketable and must be treated as non-marginable.
Foreign equity securities which do not meet the above conditions, will be treated as non-marginable and will therefore have no loan value. Note that for purposes of this no-action letter foreign equity securities do not include options.
Key Margin Definitions
Übersicht:
Below is a listing of some of the more commonly used margin terms:
Equity with Loan Value (ELV) – Forms the basis for determining whether a client has the necessary assets to either initiate or maintain security positions. Equals cash + stock value + bond value + mutual fund value + European and Asian options value (excludes market value U.S. securities & futures options and cash maintained in futures segment).
Available Funds (ELV – Initial Margin) – equals Equity with Loan Value less the Initial Margin Requirement.
Excess Liquidity (ELV – Maintenance Margin) – equals Equity with Loan Value less the Maintenance Margin Requirement.
Initial Margin Requirement - The minimum portion of a new security purchase that an investor must pay for in cash. For U.S. stocks this is defined by Reg. T and is currently 50% (Reg. T Initial Margin). As IB calculates margin on a real-time basis and Reg. T is enforced at the end of the day, IB performs an initial margin requirement check at the point of trade, albeit at a rate generally less than 50% (IB Initial Margin).
Maintenance Margin Requirement – the amount of equity which must be maintained in order to continue holding a position. In the U.S., the rules of the listing exchanges specify the maintenance margin requirements on security transactions subject to SEC approval. The exchange maintenance margin requirement for long stock positions is currently set at 25% although brokers often establish 'house margin' requirements in excess of that, particularly where the security is considered low-priced or subject to volatile price changes. The exchange maintenance margin requirement for short stock positions is currently set at 30%.
Net Liquidating Value (NLV) – for a securities account equals total cash value + stock value + securities options value + bond value + fund value. For a commodities account equals total cash value + commodities options value.
Soft Edge Margin (SEM) – if during the trading day an account’s Equity with Loan Value is equal to at least 90% of the maintenance margin requirement, it will not be subject to liquidation until 15:45 ET for U.S. stocks (i.e., the earliest of: 15 minutes before market close, 15 minutes before end of liquidation hours or start of Reg. T enforcement time) at which time the maintenance margin requirement must be met. SEM start time for U.S. stocks is 09:30 ET and for other products the later of: the market open (latest open time if multiply listed); or start of liquidation hours.
Buying Power - the maximum dollar value of securities that you can buy in your account without depositing additional equity. For a cash account this is equal to the lesser of ELV or Previous Day ELV less the Initial Margin Requirement. For a margin account this is equal to Available Funds * 4 (reciprocal of the 25% Maintenance Margin Rate)
Special Memorandum Account (SMA) – represents neither equity nor cash but rather a line of credit created when the market value of securities in a Reg. T margin account increase in value. While an increase in market value over original cost creates SMA, a subsequent decline in market value has no effect on SMA. SMA will only decline if used to purchase securities or withdraw cash and the only restriction with respect to its use is that the additional purchases or withdrawals do not bring the account below the maintenance margin requirement. SMA will also increase on a dollar for dollar basis in the event of cash deposits or dividends.
Securities Gross Position Value (GPV) – Absolute value of Long Stock Value + Short Stock Value + Long Option Value + Short Option Value + Long SSF Notional Value + Short SSF Notional Value + Fund Value.
Will IBKR delay liquidation while I deposit funds in my account?
Übersicht:
IBKR's margin compliance policy does not allow for transfers or other deposits if there is a margin violation/deficit in the account. In the case of a margin violation/deficit, the account in deficit is immediately subject to liquidation. Automated liquidations are accomplished with market orders, and any/all positions in the account can be liquidated. There are cases where, due to specific market conditions, a deficit is better addressed via a manual liquidation.
Funds deposited or wired into the account are not taken into consideration from a risk standpoint until those funds have cleared all the appropriate funds and banking channels and are officially in the account. The liquidation system is automated and programmed to act immediately if there is a margin violation/deficit.
Note for Prime Clients: Executing away is not a means to resolve real time deficits as away trades will not be taken into consideration for beneficial margin purposes until 9 pm ET on Trade Date or when the trades have been reported and matched with external confirms, whichever is later. Trading away for expiring options, on expiration day, is also discouraged due to the potential for late or inaccurate reporting which can lead to erroneous margin calculations or incorrect exercise and assignment activity. Clients who wish to trade expiring options on expiration day and away from IB, must load their FTP file no later than 2:50 pm ET, and do so at their own risk.
What formulas do you use to calculate the margin on options?
Übersicht:
There are many different formulas used to calculate the margin requirement on options. Which formula is used will depend on the option type or strategy determined by the system. There are a significant number of detailed formulas that are applied to various strategies. To find this information go to the IBKR home page at www.interactivebrokers.com. Go to the Trading menu and click on Margin. From the Margin Requirements page, click on the Options tab. There is a table on this page which will list all possible strategies, and the various formulas used to calculate margin on each.
Background:
The information above applies to equity options and index options. Options on futures employ an entirely different method known as SPAN margining. For information on SPAN margining, conduct a search on this page for “SPAN” or “Futures options margin”.
When I sell stock, how much does it increase SMA?
Übersicht:
When an account holder sells a marginable security, it will typically increase their SMA by 50% of the value of the security sold.
Why was I liquidated?
Übersicht:
The majority of all liquidations occur due to margin violations. There are two main types of margin violations that apply to margins accounts, Maintenance Margin and Reg. T Margin.
In addition to a margin deficit, liquidations may occur as a result of post expiration exposure or various other account-specific reasons which may be dependent upon the account type as well as the specific holdings within the account. For a detailed list of Risk Management algorithms applied to ensure account compliance and which may result in account liquidations, please review IBKR's website under Trading - Margin.
Background:
1. Maintenance Margin violation: In an account, the Equity with Loan Value (ELV) must always be greater than the Current Maintenance Margin Requirement (MMR) on the positions that are being held in the account. The difference between ELV and MMR is Current Excess Liquidity; therefore, an easier way for some people to monitor their account is to remember that the Current Excess Liquidity in their account must always be positive. If the Current Excess Liquidity in an account goes negative, this is a maintenance margin violation.
2. Reg T violation: In the Balances section of the Account Window there is a figure titled Special Memorandum Account (SMA). The US Fed has an enforcement period for this account; 15:50-17:20 ET each trading day. During this window, the SMA balance must be positive. If the SMA is negative at any point between 15:50 and 17:20 EST, this constitutes a Reg T margin violation.
In the event of a margin violation, the account is subject to automatic liquidation on a real-time basis. Liquidations are accomplished with market orders, and any/all positions in the account can be liquidated.
What happens if the net liquidating equity in my Portfolio Margining account falls below USD 100,000?
Übersicht:
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 Client Portal (select the Settings, Account Settings, Configure and Account Type 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.
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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?
Übersicht:
In order to enabled for portfolio margining an account must be approved for option trading and must have at least USD 110,000 in net liquidating equity (USD 100,000 to maintain, once enabled). 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 Client Portal and select the Settings and Account Settings menu options. In the Configuration section, click the gear icon next to the words "Account Type". 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.
What is SMA and how does it work?
Übersicht:
SMA refers to the Special Memorandum Account, which represents neither equity nor cash, but rather a line of credit created when the market value of securities in a Reg. T margin account increase in value. Its purpose is to preserve the buying power that unrealized gains provide towards subsequent purchases which, absent this handling, could be assured only by withdrawing excess equity and depositing it at the time the subsequent purchase is made. In that sense, SMA helps to maintain a stable account value and minimize unnecessary funding transactions.
While SMA increases as the value of a security goes up, it does not decrease if the security falls in value. SMA will only decrease when securities are purchased or cash withdrawn and the only restriction with respect to its use is that the additional purchases or withdrawals do not bring the account below the maintenance margin requirement. Transactions which serve to increase SMA include cash deposits, interest income or dividends received (on a dollar for dollar basis) or security sales (50% of the net proceeds). It’s important to note that the SMA balance represents an aggregation of each historical bookkeeping entry impacting its level starting from the time the account was opened. Given the length of time and volume of entries this typically encompasses, reconciling the current level of SMA from daily activity statements, while feasible, is impractical.
To illustrate how SMA operates, assume an account holder deposits $5,000 and purchases $10,000 of securities having a loan value of 50% (or margin requirement equal to 1 – loan value, or 50% as well). The before and after account values would appear as follows:
|
Line Item
|
Description
|
Event 1 - Initial Deposit
|
Event 2 - Stock Purchase
|
|
A.
|
Cash
|
$5,000
|
($5,000)
|
|
B.
|
Long Stock Market Value
|
$0
|
$10,000
|
|
C.
|
Net Liquidating Equity/EWL* (A + B)
|
$5,000
|
$5,000
|
|
D.
|
Initial Margin Requirement (B * 50%)
|
$0
|
$5,000
|
|
E
|
Available Funds (C - D)
|
$5,000
|
$0
|
|
F.
|
SMA
|
$5,000
|
$0
|
|
G.
|
Buying Power
|
$10,000
|
$0
|
Next, assume that the long stock increases in value to $12,000. This $2,000 increase in market value would create SMA of $1,000, which provides the account holder the ability to either: 1) buy additional securities valued at $2,000 without depositing up additional funds and assuming a 50% margin rate; or 2) withdraw $1,000 in cash, which may be financed by increasing the debit balance if the account holds no cash. See below:
|
Line Item
|
Description
|
Event 2 – Stock Purchase
|
Event 3 - Stock Increase
|
|
A.
|
Cash
|
($5,000)
|
($5,000)
|
|
B.
|
Long Stock Market Value
|
$10,000
|
$12,000
|
|
C.
|
Net Liquidating Equity/EWL* (A + B)
|
$5,000
|
$7,000
|
|
D.
|
Initial Margin Requirement (B * 50%)
|
$5,000
|
$6,000
|
|
E
|
Available Funds (C - D)
|
$0
|
$1,000
|
|
F.
|
SMA
|
$0
|
$1,000
|
|
G.
|
Buying Power
|
$0
|
$2,000
|
*EWL represents equity with loan value which, in this example, equals net liquidating equity.
Finally, note that SMA is a Reg. T concept used to evaluate whether securities accounts carried by IB LLC are in compliance with overnight initial margin requirements and it is not used to determine compliance with maintenance margin requirements on either an intraday or overnight basis. It is also not used to determine whether commodities accounts are margin compliant. Similarly, accounts which report negative SMA at the time each day when overnight, or Reg.T initial margin requirements go into effect (15:50 ET) are subject to position liquidations to ensure margin compliance.
