CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 61% of retail investor accounts lose money when trading CFDs with IBKR. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. |
The Central Bank of Ireland (CBI) enacted new rules applicable to retail clients trading CFDs, effective 1st August 2019. Professional clients are unaffected.
The rules consist of: 1) leverage limits; 2) a margin close out rule on a per account basis; 3) negative balance protection on a per account basis; 4) a restriction on the incentives offered to trade CFDs; and 5) a standardized risk warning.
Most clients (excepting regulated entities) are initially categorised as Retail Clients. IBKR may in certain circumstances agree to reclassify a Retail Client as a Professional Client, or a Professional Client as a Retail Client. Please see MiFID Categorisation for further detail.
The following sections detail how IBKR has implemented the CBI Decision.
1 Leverage Limits
1.1 Margins
Leverage limits were set by CBI at different levels depending on the underlying:
1.2 Applied Margins - Standard Requirement
In addition to the CBI Margins, IBKR establishes its own margin requirements (IB Margins) based on the historical volatility of the underlying, and other factors. We will apply the IB Margins if they are higher than those prescribed by CBI .
Details of applicable IB and CBI margins can be found here.
1.2.1 Applied Margins - Concentration Minimum
A concentration charge is applied if your portfolio consists of a small number of CFD and/or Stock positions, or if the three largest positions have a dominant weight. We stress the portfolio by applying a 30% adverse move on the three largest positions and a 5% adverse move on the remaining positions. The total loss is applied as the maintenance margin requirement if it is greater than the standard requirement for the combined Stock and CFD positions. Note that the concentration charge is the only instance where CFD and Stock positions are margined together.
1.3 Funding of Initial Margin Requirements
You can only use cash to post initial margin to open a CFD position.
Initially all cash used to fund the account is available for CFD trading. Any initial margin requirements for other instruments and cash used to purchase cash stock reduce the available cash. If your cash stock purchases have created a margin loan, no funds are available for CFD trades even if your account has significant equity. We cannot increase a margin loan to fund CFD margin under the CBI rules.
Realized CFD profits are included in cash and are available immediately; the cash does not have to settle first. Unrealized profits however cannot be used to meet initial margin requirements.
2 Margin Close Out Rule
2.1 Maintenance Margin Calculations & Liquidations
The CBI requires IBKR to liquidate CFD positions latest when qualifying equity falls below 50% of the initial margin posted to open the positions. IBKR may close out positions sooner if our risk view is more conservative. Qualifying equity for this purpose includes CFD cash and unrealized CFD P&L (positive and negative). Note that CFD cash excludes cash supporting margin requirements for other instruments.
The basis for the calculation is the initial margin posted at the time of opening a CFD position. In other words, and unlike margin calculations applicable to non-CFD positions, the initial margin amount does not change when the value of the open position changes.
2.1.1 Example
You have EUR 2000 cash in your account and no open positions. You want to buy 100 CFDs of XYZ at a limit price of EUR 100. You are first filled 50 CFDs and then the remaining 50. Your available cash reduces as your trades are filled:
|
Cash |
Equity* |
Position |
Price |
Value |
Unrealized P&L |
IM |
MM |
Available Cash |
MM Violation |
Pre Trade |
2000 |
2000 |
|
|
|
|
|
|
2000 |
|
Post Trade 1 |
2000 |
2000 |
50 |
100 |
5000 |
0 |
1000 |
500 |
1000 |
No |
Post Trade 2 |
2000 |
2000 |
100 |
100 |
10000 |
0 |
2000 |
1000 |
0 |
No |
*Equity equals Cash plus Unrealized P&L
The price increases to 110. Your equity is now 3000, but you cannot open additional positions because your available cash is still 0, and under the CBI rules IM and MM remain unchanged:
|
Cash |
Equity |
Position |
Price |
Value |
Unrealized P&L |
IM |
MM |
Available Cash |
MM Violation |
Change |
2000 |
3000 |
100 |
110 |
11000 |
1000 |
2000 |
1000 |
0 |
No |
The price then drops to 95. Your equity declines to 1500 but there is no margin violation since it is still greater than the 1000 requirement:
|
Cash |
Equity |
Position |
Price |
Value |
Unrealized P&L |
IM |
MM |
Available Cash |
MM Violation |
Change |
2000 |
1500 |
100 |
95 |
9500 |
(500) |
2000 |
1000 |
0 |
No |
The price falls further to 85, causing a margin violation and triggering a liquidation:
|
Cash |
Equity |
Position |
Price |
Value |
Unrealized P&L |
IM |
MM |
Available Cash |
MM Violation |
Change |
2000 |
500 |
100 |
85 |
8500 |
(1500) |
2000 |
1000 |
0 |
Yes |
3 Negative Equity Protection
The CBI Decision limits your CFD-related liability to the funds dedicated to CFD-trading. Other financial instruments (e.g., shares or futures) cannot be liquidated to satisfy a CFD margin-deficit.*
Therefore, non-CFD assets are not part of your capital at risk for CFD trading.
Should you lose more than the cash dedicated to CFD trading, IB must write off the loss.
As Negative Equity Protection represents additional risk to IBKR, we will charge retail investors an additional financing spread of 1% for CFD positions held overnight. You can find detailed CFD financing rates here.
*Although we cannot liquidate non-CFD positions to cover a CFD deficit, we can liquidate CFD positions to cover a non-CFD deficit.