Will a long SSF ever trade at a discount to the underlying stock?

Overview: 

 

When a large dividend payment is forthcoming or if the underlying stock is difficult to borrow, the futures price may trade at a discount to the actual cash price.

Why does a long SSF typically trade at a premium to the underlying stock?

Overview: 

 

Single Stock Futures will typically trade at a premium to the stock price because of an adjustment for interest rates. The premium reflects the interest earned on the capital saved by not posting the full value of the underlying stock (adjusted for any dividends expected to be received prior to expiration).

How are SSFs priced?

Overview: 

 

Single Stock Futures (SSF) may be priced using the following formula:

 

Futures Price = Stock Price * (1 + (Annualized Interest Rate * Days to Expiration/365)) – Present Value of Dividends due prior to expiration.

 

Example: On 12/12/07 MSFT closed at $35.31 and has an expected dividend of $0.11 with an ex-date of 2/12/07 (61 days).  Assuming an interest rate factor of 4.5%, what is the 12/12/07 settlement price for the MSFT March 2008 SSF (97 days to maturity)?

 

$35.62 = $35.31 * (1 + (.045 * 97/365)) – ($0.11/(1 + (.045 * 61/365)))

Is a US Single Stock Future a security or commodity product?

Overview: 

US Single tock Futures (SSF) are a hybrid product, regulated jointly by the SEC and CFTC and allowed to be carried in either a securities account or commodities account.  IBKR elects to carry all SSFs in the security side of an account as this is the only way that margin offset can be provided against other security products (i.e., stock, options). 

US SSFs are listed at the OneChicago exchange and are cleared through OCC.

Are there any particular risks that one should be aware of when using SSFs to either invest excess funds or borrow funds at available synthetic rates?

Overview: 

While the High and Low Synthetic strategies are both hedged positions, the futures leg is subject to a daily cash variation of the mark-to-market gain or loss whereas the stock leg is not (mark-to-market gain or loss is reflected in account equity but there is no cash impact until the position is closed).  If, for example, an account holds a High Synthetic position and the stock prices increases significantly, the resultant variation pay on the short futures leg may erode the account’s cash balance resulting in a debit balance which is subject to interest payments.  The net effect in this example would be to reduce and potentially erase the earnings on the High Synthetic position

What positions are eligible for Portfolio Margining?

Overview: 

Portfolio Margining is eligible for US securities positions including stocks, ETFs, stock and index options and single stock futures.  It does not apply to US futures or futures options positions or non-US stocks, which may already be margined using an exchange approved risk based margining methodology.

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?

Overview: 

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?

Overview: 

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.

 

 

How do I transfer my US securities positions from my current broker to IB?

Overview: 

Broker to broker transfers for US securities are conducted via a process known as the Automated Customer Account Transfer Service or ACATS.  This process generally takes between 4 to 8 business days to complete in order to accommodate the verification of the transferring account and positions. The request is always initiated via the receiving broker (IB in this case) and can be prompted by following the steps below.

1.      Log into Account Management and select the Transfer & Pay and then Transfer Positions menu options.

2.      From the Transaction Type drop-down list select 'Inbound Position'

3.      From the Method drop-down list select 'ACATS'.

4.      Enter the sending Broker Information in the fields provided, and click CONTINUE

5.      In the Transaction Information section, indicate whether or not you wish to transfer all assets and select Yes to the authorization option. 

a.       Note that a "transfer all assets" election does not require that you specify any assets as an attempt will be made to transfer your account in its entirety.  Account holders should note, however, that certain positions may not be on the list of securities eligible to trade at IB and others, while transferable, may be subject to a house margin requirement higher than that of the delivering broker.  In the event IB receives an asset list from the delivering broker which includes ineligible positions or the aggregate of the positions transferred are such that a margin deficit would exist were the transfer to occur, IB will attempt to contact you to remedy the situation within the allocated time frame after which an automatic reject of the full transfer would take effect.  Account holders may wish to minimize potential delays or problems associated with a ‘Full’ transfer request by verifying security eligibility and margin requirements via the Contract Search link located at the upper right hand corner of the IB homepage prior to initiating the transfer.

b.      If you elect to not "transfer all assets", the system will require that you specify the positions you wish to transfer. Click Add Asset to add the positions you wish to transfer. Fill out the Asset Search and Transaction Information sections and click Continue.

6.      On the page that appears, type your signature in the Signature field, and then click CONTINUE.
Click BACK to modify the transfer request.

Please note that brokers generally freeze the account during the transfer period to ensure an accurate snapshot of assets to transfer and may restrict the transfer of option positions during the week prior to expiration. You may wish to check with the delivering broker to verify their policy in this regard. In addition, please note if your IB account is currently maintaining positions on margin, any cash withdrawals or adverse market moves could increase the likelihood that your account falls out of margin compliance during the transfer period which may delay or prevent completion of the transfer. 

 

IMPORTANT NOTICE

Applicants may meet the initial account funding requirement through the transfer of securities positions and/or cash via the ACATS system.

Why has my order to initiate a position in Berkshire Hathaway B Shares (BRK B) not been filled?

Overview: 

Traders should familiarize themselves with the unit of trade convention for BRK B along with IB’s policies with respect to odd lot orders.  Due to the relatively low trading volume in BRK B, NYSE Arca (the primary listing exchange for this security) has designated it as a 10-share unit issue.  A round lot in this security is therefore set at 10 shares as opposed to the standard round lot unit of 100 shares. If your opening buy or sell order is for an amount less than 10 shares, it is considered an odd-lot.  As a matter of policy, odd-lot orders are prohibited from being routed to NYSE Arca.  In addition, only those odd-lot orders which serve to open a position and which are part of a basket order or market-on-close (MOC) order may be sent to NYSE or AMEX.   Opening orders which do not meet that criteria are typically routed to a regional exchange or an ECN where they will remain until a matching order is found.  Odd-lot orders which serve to close a position may be routed to any market center to which IBKR routes orders and can be directed either by the client or via IB SmartRouting.

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