The term "excess margin securities" refers to margin securities carried for the account of a customer having a market value in excess of 140 percent of the total debit balance in the customer's account. These securities are in excess of the securities held in a customer's margin account that are pledged by the customer as collateral for the margin loan and can be used to support the purchase of additional securities on margin

Example:

A customer whose account equity consists solely of a cash balance of USD 10,000 on Day 1 purchases 400 shares of stock ABC at USD 50 per share on Day 2.

On Day 2, the customer's excess margin securities total USD 6,000. This is calculated by subtracting 140% of the margin debit or loan balance from the market value of the stock position ($6,000 = $20,000 - {1.4 * $10,000}).

The term is relevant from a regulatory perspective as the SEC requires that U.S. broker dealers segregate and maintain in a good control location (e.g., DTC or bank) all customer securities which are deemed excess margin securities. Such securities cannot be pledged or loaned to finance the activities of the firm or other customers without specific written permission from the customer. The portion of the securities classified as margin securities ($20,000 - $6,000 or $14,000 in this example) are subject to a lien and may be pledged or loaned by the broker to others to assist in financing the loan made to the customer.

Note that securities which were excess margin at the date of acquisition may later be reclassified as margin securities based upon the customer's subsequent trade and/or margin borrowing activity. For example, if the loan value of excess margin securities is subsequently used to acquire additional securities on margin, a portion of securities will then be reclassified as margin securities and subject to a lien. If the customer subsequently deposits cash or sells securities to reduce or eliminate the margin loan, the securities will be reclassified as excess margin or fully paid and are required to be segregated.
See also "fully paid securities".

INTRODUCTION
The regulation of securities and commodities products and brokers¹ in the U.S. is administered by two distinct federal agencies, the Securities and Exchange Commission (SEC) for securities including stocks, ETFs, bonds, options and mutual funds and the Commodities Futures Trading Commission (CFTC) for commodities including futures and options on futures.² While both agencies seek to safeguard customer assets by restricting their use and “segregating” them from assets of the broker, the regulations and manner in which they accomplish this differs. The following article provides a basic overview of two segregation models and additional considerations relating to IB accounts.

OVERVIEW
Differences between the CFTC and SEC segregation models originate largely from the products themselves, whose characteristics are fundamentally unique. Commodity products, by nature, do not involve an extension of credit by the broker to the customer as a futures contract is not an asset but rather a contingent liability which is marked-to-market and a long futures option, while an asset, must be paid for in-full. Consequently, non-option assets in a commodities account are generally comprised of funds deposited as margin to secure performance on the contracts therein. Since the broker may not use the funds of one customer to margin or guarantee the transactions of another, the commodities segregation requirement (CFTC Rules 1.20 – 1.30) is equal to the gross assets of all customers and the broker needs to add its own funds to segregation to cover customers whose net equity is in deficit.

A securities margin account, in contrast, can facilitate the extension of credit for the purpose of long securities (e.g., stocks, bonds) purchases or short securities sales on a secured basis. The segregation or reserve requirement rules recognize this through special provisions for the protection of each of the cash and securities components, further distinguishing fully-paid securities from those whose purchase the broker has financed and maintains a lien upon. Here, the broker must deposit into a separate bank account the net amount of customer cash balances³, in accordance with a formula set forth in SEC Rule 15c3-3. In addition, the broker must identify and segregate in a good control location (e.g., depository, bank) customer securities which meet the definition of “fully paid” or “excess margin”.

The table below provides a comparison of the main principals of each model.

ADDITIONAL CONSIDERATIONS
In addition to the safeguards afforded through segregation, IB employs a number of policies and practices which serve to enhance the safety and security of accounts beyond that outlined above. These include the following:

- IB computes its securities segregation or reserve requirement on a daily rather than weekly basis as allowed by regulation, thereby ensuring timely determination as to the amount required to be reserved and the deposit of funds necessary to satisfy the requirement.

- IB’s does not avail itself of the generally more permissive rules with respect to the investment of commodity customer cash balances. These balances are instead invested in a manner similar to that of securities cash balances (i.e., U.S. government securities) with the exception of an occasional investment in money market funds.

- All customer securities positions are held in the securities segment of the Universal Account as opposed to the commodities (commodities margin met with cash and/or futures options), thereby limiting their hypothecation to the more restrictive rules of the SEC.

- In addition to SIPC coverage, IB maintains an excess SIPC policy with Lloyd's of London which, in aggregate with SIPC, offers insurance totaling $30 million (with a cash sublimit of $900,000), subject to an aggregate firm limit of $150 million.

- IB offers account holders the ability to sweep cash balances in excess of that required for margin purposes in either the securities or commodities segment to the other segment. Details as to this feature may be found in KB1851.

- For additional information regarding IB strength and security, please review the following website page.

Other Relevant Knowledge Base Articles:

Cash Sweeps

Information Regarding SIPC Coverage

Footnotes:

¹The term broker as used in this article is intended to refer to an organization registered with both the SEC as a Broker-Dealer and the CFTC as a Futures Commission Merchant for the purpose of conducting customer transactions

²Single stock futures are a hybrid product jointly regulated by the SEC and CFTC and allowed to be carried in either account type.

³Including cash obtained through the use of customer securities such bank pledges or stock loans less cash required to finance customer transactions (e.g., stock borrows, customer fails to deliver of securities, or margin deposited for short option positions with OCC).

⁴Assets, or customer property, which securities customers share in proportion to their net equity claim, include cash, margin securities and fully-paid securities held in “street name”. IB does not hold securities in the customer’s name which are not considered bulk customer property.

Who Is a "Large Trader"?
"Large Trader" is defined as a person or entity who, directly or indirectly, through the exercise of "Investment Discretion," effects transactions in exchange-listed equities and options that equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million over the course of any calendar month.

Investment Discretion is defined broadly to include all types of discretion involving decisions to buy or sell exchange-listed equities or options. Large Trader status applies to the adviser or agent having trading discretion over an account - not to the account or to the beneficial owner of the account if they are not the party exercising investment discretion.

The Large Trader Rule applies to any type of agent having Investment Discretion over an account, including broker-dealers, and requires each Large Trader to register if the defined trigger levels are met. Large Traders include regulated and unregulated entities as well as domestic and foreign persons. Individuals trading for their own account or for an LLC or other entity holding their own assets are also subject to the registration requirements of the Rule.  Also note that for the purpose of determining the value of shares traded, each option contract is assumed to be equal to 100 shares of its underlying security (or other share equivalent, if adjusted by OCC).

Dollar Calculation for Options

Dollars traded = option contracts traded * option multiplier (typically 100) * the market price of the options.

Ex., If ABC has a multiplier of 100, a person who purchased 200 ABC call options for $400 each would have effected an aggregate transaction of $8 million (i.e., 200 * 400 * 100 = $8,000,000).

Requirements
The Rule contains the following requirements:

Filing a Form: A trader who engages in a substantial level of trading activity is required to analyze whether they meet the definition of Large Trader and, if they qualify, identify them self to the SEC by filing a Form 13H with the Commission. The rule provides guidance on certain types of transactions that are excluded for purposes of  calculating trading levels.

Getting an Identification Number: After a large trader submits a Form 13H to the SEC, they will be assigned a Large Trader Identification Number (LTID). A large trader will be required to disclose to its broker-dealers its LTID and indicate to which accounts the LTID applies. This disclosure requirement applies not only to broker-dealers that carry the accounts (including prime brokers and clearing brokers) but also to executing brokers, such as Interactive Brokers.

Recordkeeping, Reporting, and Monitoring: The rule requires broker-dealers to maintain and report data when requested by the SEC. In addition, the rule requires broker-dealers to monitor whether their customers meet the threshold levels that define a Large Trader (based on transactions handled at the broker-dealer) in order to encourage compliance with the requirement for customers to identify themselves as Large Traders to the SEC.

Timing and Types of 13H Filings
Form 13H provides for six types of filings:

• Initial Filing: A person must "promptly" file an initial Form 13H after its transactions reach the identifying activity level. The SEC states that under normal circumstances, "promptly" means 10 days.
• Annual Filing: After its initial filing, Large Traders must file an annual Form 13H within 45 days after the end of each full calendar year.
• Amended Filing: In the event any of the information in its Form 13H becomes inaccurate for any reason, Large Traders must file an amended 13H following the end of the calendar quarter.
• Inactive/Reactivated Filing: A Large Trader that ceases to meet the identifying activity level during the previous full calendar year may file an inactive status Form 13H, which permits such trader to cease both filing a Form 13H and disclosing its Large Trader status. In the event such trader's transactions once again meet the identifying activity level, it must submit a reactivated status Form 13H.
• Termination Filing: A Large Trader that ceases operations or, in some cases, is acquired, may file a termination Form 13H terminating its Large Trader status.

Voluntary Filing & Confidentiality
A Trader can file Form 13H on a voluntary basis instead of when trading thresholds are met in order to avoid the requirement to monitor their own trading levels and to aggregate trading activity across accounts they manage or entities under common control. As a result, a trader can ensure full compliance with the Rule through voluntary filing.
Large Trader Form 13H filings are not accessible to the public. All registration information provided to the SEC by large traders is confidential and is also exempt from disclosure under the Freedom of Information Act.

For complete details regarding the Large Trader Rule, please see the SEC release at:
www.sec.gov/rules/final/2011/34-64976.pdf.

For responses to frequently asked questions concerning large trader reporting, including how to access the form, please refer to:
http://www.sec.gov/divisions/marketreg/large-trader-faqs.htm

Details on how to file Form 13H electronically through EDGAR can be reviewed at:
http://www.sec.gov/info/edgar.shtml
 

Position limits are defined on regulatory websites and may change periodically.  Some contracts also have near-term limit requirements (near-term position limits are applied to the side of the market for those contracts that are in the closest expiring month issued).  Traders are responsible for monitoring their positions as well as the defined limit quantities to ensure compliance.  The following information defines how position limits are calculated;

Option position limits are determined as follows:

• Bullish market direction -- long call & short put positions are aggregated and quantified in terms of equivalent shares of stock.

• Bearish market direction -- long put & short call positions are aggregated and quantified in terms of equivalent shares of stock.

The following examples, using the 25,000 option contract limit, illustrate the operation of position limits:

• Customer A, who is long 25,000 XYZ calls, may at the same time be short 25,000 XYZ calls, since long and short positions in the same class of options (i.e., in calls only or in puts only) are on opposite sides of the market and are not aggregated
• Customer B, who is long 25,000 XYZ calls, may at the same time be long 25,000 XYZ puts. Rule 4.11 does not require the aggregation of long call and long put (or short call and short put) positions, since they are on opposite sides of the market.
• Customer C, who is long 20,000 XYZ calls, may not at the same time be short more than 5,000 XYZ puts, since the 25,000 contract limit applies to the aggregate position of long calls and short puts in options covering the same underlying security. Similarly, if Customer C is also short 20,000 XYZ calls, he may not at the same time have a long position of more than 5,000 XYZ puts, since the 25,000 contract limit applies separately to the aggregation of short call and long put positions in options covering the same underlying security.

Notifications and restrictions:

IB will send notifications to customers regarding the option position limits at the following times:

• When a client exceeds 85% of the allowed limit IB will send a notification indicating this threshold has been exceeded
• When a client exceeds 95% of the allowed limit IB will place the account in closing only. This state will be maintained until the account falls below 85% of the allowed limit. New orders placed that would increase the position will be rejected.

Notes:

Position limits are set on the long and short side of the market separately (and not netted out).
Traders can use an underlying stock position as a "hedge" if they are over the limit on the long or short side (index options are reviewed on a case by case basis for purposes of determining which securities constitute a hedge).
Position information is aggregated across related accounts and accounts under common control.

Definition of related accounts:

IB considers related accounts to be any account in which an individual may be viewed as having influence over trading decisions. This includes, but is not limited to, aggregating an advisor sub-account with the advisor's account (and accounts under common control), joint accounts with individual accounts for the joint parties and organization accounts (where an individual is listed as an officer or trader) with other accounts for that individual.

Position limit exceptions:

Regulations permit clients to exceed a position limit if the positions under common control are hedged positions as specified by the relevant exchange. In general the hedges permitted by the US regulators that are recognized in the IB system include outright stock position hedges, conversions, reverse conversions and box spreads. Currently collar and reverse collar strategies are not supported hedges in the IB system. For more detail about the permissible hedge exemptions refer to the rules of the self regulatory organization for the relevant product.

OCC posts position limits defined by the option exchanges.   They can be found here.
http://www.optionsclearing.com/webapps/position-limits