Dear Interactive Brokers Customer:
Interactive Brokers ("IB") is required by its regulators to periodically provide you with certain disclosures and other information. Accordingly, we are delivering the following documents to you:
Please make sure to check the IB website frequently for announcements and information, particularly regarding the functionalities of IB’s trading platform, and services, policies, news, and regulatory information. Information regarding webinars and other training tools in connection with IB’s trading platform are also available on IB’s website. If you have any questions in relation to the information provided on IB’s website, please contact IB Customer Service using the information available at https://www.interactivebrokers.com/help.
As always, we thank you for using Interactive Brokers.
Interactive Brokers (“IB”) is furnishing this document to you to provide some basic facts about purchasing securities and futures contracts on margin, and to alert you to the risks involved with trading in a margin account. “Margin trading” can mean engaging in a transaction in which securities are purchased partially through a margin loan extended to you by IB, for which the securities act as collateral. Margin trading can also mean trading investment products such as futures or options in which an initial “margin” deposit is made to secure your obligations and further margin may be required to secure your obligations as the value of your positions changes.
This document also describes special risks associated with trading on margin in an IRA account, as described below.
Before trading stocks, futures or other investment products in a margin account, you should carefully review the margin agreement provided by IB and you should consult IB regarding any questions or concerns you may have with your margin accounts.
When you purchase securities, you may pay for the securities in full or you may borrow part of the purchase price from IB. If you choose to borrow funds from IB, you will open a margin account with the firm. The securities purchased are IB’s collateral for the loan to you. If the securities or futures contracts in your account decline in value, so does the value of the collateral supporting your loan and, as a result, IB can take action, such as sell securities or other assets in any of your accounts held with IB or issue a margin call, in order to maintain the required equity in the account.
You should understand that pursuant to the IB Margin Agreement, IB generally will not issue margin calls, that IB will not credit your account to meet intraday margin deficiencies and that IB generally will liquidate positions in your account in order to satisfy margin requirements without prior notice to you and without an opportunity for you to choose the positions to be liquidated or the timing or order of liquidation.
In addition, it is important that you fully understand the risks involved in trading securities or futures contracts on margin. These risks include the following:
OVERVIEW OF PORTFOLIO MARGINING
CUSTOMERS ELIGIBLE FOR PORTFOLIO MARGINING
POSITIONS ELIGIBLE FOR A PORTFOLIO MARGIN ACCOUNT
SPECIAL RULES FOR PORTFOLIO MARGIN ACCOUNTS
**Please note that pursuant to the IB Customer Agreement, IB reserves the right to liquidate positions prior to the fourth business day. **
SPECIAL RISKS OF PORTFOLIO MARGIN ACCOUNTS
The general provisions governing portfolio margining (including definitions used in this document) are set forth in NYSE Rule 431(g) and FINRA Rule 4210(g), which can be found at http://nyserules.nyse.com/NYSE/Rules and www.finra.org.
Electronic trading and order routing systems differ from traditional open outcry pit trading and manual order routing methods. Transactions using an electronic system are subject to the rules and regulations of the exchanges offering the system and/or listing the contract. You are responsible for directing your trading in accordance with the relevant policies, procedures and trading rules of the exchanges or systems to which your orders are routed. Before you engage in transactions using an electronic system, you should carefully review the rules and regulations of the exchanges offering the system and/or listing the instruments you intend to trade.
DIFFERENCES AMONG ELECTRONIC TRADING SYSTEMS: Trading or routing orders through electronic systems varies widely among the different electronic systems. You should consult the rules and regulations of the exchange offering the electronic system and/or listing the contract traded or order routed to understand, among other things, in the case of trading systems, the system's order matching procedure, opening and closing procedures and prices, error trade policies, and trading limitations or requirements, and, in the case of all systems, qualifications for access and grounds for termination and limitations on the types of orders that may be entered into the system. Each of these matters may present different risk factors with respect to trading on or using a particular system. Each system may also present risks related to system access, varying response times, and security. In the case of Internet-based systems, there may be additional types of risks related to system access, varying response times and security, as well as risks related to service providers and the receipt and monitoring of electronic mail.
RISKS ASSOCIATED WITH SYSTEM FAILURE: Trading through an electronic trading or order routing system exposes you to risks associated with system or component failure. In the event of system or component failure, it is possible that, for a certain time period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. System or component failure may also result in loss of orders or order priority. In this regard, Customer must maintain alternative trading arrangements in addition to Customer's IB account in the event that the IB system is unavailable for any reason.
SIMULTANEOUS OPEN OUTCRY PIT AND ELECTRONIC TRADING: Some contracts offered on an electronic trading system may be traded electronically and through open outcry during the same trading hours. You should review the rules and regulations of the exchange offering the system and/or listing the contract to determine how orders that do not designate a particular process will be executed.
LIMITATION OF LIABILITY: Exchanges offering an electronic trading or order routing system and/or listing the contract may have adopted rules to limit their liability, the liability of FCMs and software and communication system vendors, and the amount of damages you may collect for system failure and delays. These limitations of liability provisions vary among the exchanges. You should consult the rules and regulations of the relevant exchanges in order to understand these liability limitations.
INTERNET SERVICES: To the extent that Customer or IB use Internet services to transport data or communications, IB disclaims any liability for interception of any such data or communications. IB is not responsible, and makes no warranties regarding, the access, speed, availability or security of Internet or network services.
There are special characteristics and unique risks associated with trading in securities at times that are outside the ordinary trading hours for the exchange(s) upon which such securities are traded ("After-Hours Trading" or “Extended Hours Trading”). Customers must familiarize themselves with these risks and determine whether After-Hours Trading is appropriate in light of their objectives and experience. Customers are responsible for familiarizing themselves with the hours of the relevant markets upon which they trade and for determining when to place orders for particular securities, how they wish to direct those orders, and what types of orders to use. Interactive Brokers' offer of After-Hours Trading does not constitute a recommendation or conclusion that After-Hours Trading will be successful or appropriate for all customers or trades.
Some risks associated with After-Hours Trading are as follows:
During After-Hours Trading, Interactive Brokers ("IB") may provide quotations from and execute Customer trades through various Electronic Communications Networks ("ECNs"), exchanges or other trading systems ("After-Hours Trading Facilities"). Quotations provided during After-Hours Trading may be different than quotations provided during exchange trading hours. Likewise, it is possible that the quotations displayed by IB from After-Hours Trading Facilities on which IB can execute Customer trades may be less favorable than those on other After-Hours Trading Facilities to which IB does not have access. Last sale information provided by IB may not reflect the prices of the most recent trades on all of the various After-Hours Trading Facilities.
For a list of trading hours for exchanges and ECNs, click here.
Rules of the U.S. National Futures Association ("NFA") require Interactive Brokers ("IB") to provide you with the following Risk Disclosure Statement:
RISK DISCLOSURE STATEMENT
OFF-EXCHANGE FOREIGN CURRENCY ("FOREX") TRANSACTIONS INVOLVE THE LEVERAGED TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR COUNTERPARTY. BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED HERE, YOU CAN RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH TRADING AND YOU MAY LOSE MORE THAN YOU DEPOSIT.
YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.
(1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE—YOUR DEALER IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM THE REGISTRATION STATUS OF YOUR COUNTERPARTY.
The off-exchange foreign currency trading you are entering into is not conducted on an interbank market, nor is it conducted on a futures exchange subject to regulation as a designated contract market by the Commodity Futures Trading Commission (“CFTC”). The foreign currency trades you transact are trades with the futures commission merchant or retail foreign exchange dealer as your Counterparty. WHEN YOU SELL, THE DEALER IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when you lose money trading, your dealer is making money on such trades, in addition to any fees, commissions, or spreads the dealer may charge.
(2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER.
Any trading platform that you may use to enter off-exchange foreign currency transactions is only connected to your futures commission merchant or retail foreign exchange dealer. You are accessing that trading platform only to transact with your dealer. You are not trading with any other entities or customers of the dealer by accessing such platform. The availability and operation of any such platform, including the consequences of the unavailability of the trading platform for any reason, is governed only by the terms of your account agreement with the dealer.
(3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS.
All of your rights associated with your retail forex trading, including the manner and denomination of any payments made to you, are governed by the contract terms established in your account agreement with the futures commission merchant or retail foreign exchange dealer. Funds deposited by you with a futures commission merchant or retail foreign exchange dealer for trading off-exchange foreign currency transactions are not subject to the customer funds protections provided to customers trading on a contract market that is designated by the CFTC. Your dealer may commingle your funds with its own operating funds or use them for other purposes. In the event your dealer becomes bankrupt, any funds the dealer is holding for you in addition to any amounts owed to you resulting from trading, whether or not any assets are maintained in separate deposit accounts by the dealer, may be treated as an unsecured creditor's claim.
(4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES.
Your ability to close your transactions or offset positions is limited to what your dealer will offer to you, as there is no other market for these transactions. Your dealer may offer any prices it wishes, and it may offer prices derived from outside sources or not in its discretion. Your dealer may establish its prices by offering spreads from third party prices, but it is under no obligation to do so or to continue to do so. Your dealer may offer different prices to different customers at any point in time on its own terms. The terms of your account agreement alone govern the obligations your dealer has to you to offer prices and offer offset or liquidating transactions in your account and make any payments to you. The prices offered by your dealer may or may not reflect prices available elsewhere at any exchange, interbank, or other market for foreign currency.
(5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS
The futures commission merchant or retail foreign exchange dealer may compensate introducing brokers for introducing your account in ways which are not disclosed to you. Such paid solicitors are not required to have, and may not have, any special expertise in trading, and may have conflicts of interest based on the method by which they are compensated. Solicitors working on behalf of futures commission merchants and retail foreign exchange dealers are required to register. You should confirm that they are, in fact registered. You should thoroughly investigate the manner in which all such solicitors are compensated and be very cautious in granting any person or entity authority to trade on your behalf. You should always consider obtaining dated written confirmation of any information you are relying on from your dealer or a solicitor in making any trading or account decisions.
FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS MAY INDICATE POTENTIAL SALES FRAUD.
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.
PERFORMANCE OF INTERACTIVE BROKERS RETAIL CUSTOMER FOREX ACCOUNTS FOR THE PAST FOUR CALENDAR QUARTERS:
The table below sets forth the percentage of non-discretionary retail forex customer accounts maintained by Interactive Brokers LLC that were profitable and unprofitable for the past four calendar quarters. The accounts were identified and these statistics were calculated according to the definitions and interpretations set forth by the CFTC and NFA.1
|TIME PERIOD||NUMBER OF ACCOUNTS||PERCENTAGE OF PROFITABLE ACCOUNTS||PERCENTAGE OF UNPROFITABLE ACCOUNTS|
 Information regarding the performance of Interactive Brokers retail forex customers for the past 5 years is available upon request.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FURTHER INFORMATION PROVIDED BY INTERACTIVE BROKERS:
A. Overview: Interactive Brokers Multi-Currency enabled accounts allow IB Customers to trade investment products denominated in different currencies using a single IB account denominated in a "base" currency of the customer's choosing. IB Customers can also use their Multi-Currency enabled accounts to conduct foreign exchange transactions in order to manage credits or debits generated by foreign securities, options or futures trading, to convert such credits or debits back into the Customer's base currency, or to hedge or speculate. IB foreign exchange transactions offered to retail customers are forex spot transactions.
B. Nature of Your Account and Whether SIPC Covers Foreign Currency: Foreign currency trading at Interactive Brokers takes place in a securities account. Your IB securities account is governed by rules of the U.S. Securities and Exchange Commission ("SEC") and the Financial Industry Regulatory Authority. In addition, IB observes the rules of the National Futures Association in connection with foreign currency trading.
Interactive Brokers LLC is a member of the Securities Investor Protection Corporation ("SIPC"). SIPC protects cash and securities held with Interactive Brokers as specified in the Securities Investor Protection Act. SIPC protects cash, including US dollars and foreign currency, to the extent that the cash was deposited with Interactive Brokers for the purpose of purchasing securities.
Whether foreign currency in your IB account would be protected by SIPC would depend in part on whether the cash was considered to be deposited with Interactive Brokers for the purpose of purchasing securities. Interactive Brokers expects that at least one factor in deciding this would be whether and the extent to which the customer engages in securities trading in addition to or in conjunction with forex trading, but, as discussed in section 3 above, funds deposited specifically for forex trading have no regulatory protections under NFA rules or CFTC regulations. For further information, you must contact your own legal counsel or SIPC.
Customer money held in the securities account is subject to Securities Exchange Act Rule 15c3-3 governing customer reserve requirements. Although relevant regulations only require computation of the 15c3-3 reserve requirement and associated segregation of customer funds to be performed weekly, IB performs such calculations and segregation on a daily basis.
C. General Risk: Customer understands and acknowledges that buying and selling securities, options, futures and other financial products that are denominated in foreign currencies or traded on foreign markets is inherently risky and requires substantial knowledge and expertise. Customers applying for Interactive Brokers Multi-Currency enabled accounts represent that they are aware of and understand the risks involved in trading foreign securities, options, futures and currencies and that they have sufficient financial resources to bear such risks.
D. Customer Responsibility for Investment Decisions: Customer acknowledges that IB representatives are not authorized to provide investment, trading or tax advice and therefore will not provide advice or guidance on trading or hedging strategies in the Multi-Currency enabled account. Customers must evaluate carefully whether any particular transaction is appropriate for them in light of their investment experience, financial objectives and needs, financial resources, and other relevant circumstances and whether they have the operational resources in place to monitor the associated risks and contractual obligations over the term of the transaction. In making these assessments, IB strongly recommends that Customers obtain independent business, legal, and accounting advice before entering into any transactions.
E. Exchange Rate Risk: Exchange rates between foreign currencies can change rapidly due to a wide range of economic, political and other conditions, exposing the Customer to risk of exchange rate losses in addition to the inherent risk of loss from trading the underlying financial product. If a Customer deposits funds in a currency to trade products denominated in a different currency, Customer's gains or losses on the underlying investment therefore may be affected by changes in the exchange rate between the currencies. If Customer is trading on margin, the impact of currency fluctuation on Customer's gains or losses may be even greater.
F. Currency Fluctuation: When Customer uses the foreign exchange facility provided by IB to purchase or sell foreign currency, fluctuation in currency exchange rates between the foreign currency and the base currency could cause substantial losses to the Customer, including losses when the Customer converts the foreign currency back into the base currency.
G. Nature of Foreign Currency Exchange Transactions Between Customer and IB: When Customer enters into a foreign exchange transaction with IB, IB, as the counterparty to Customer's trade, may effectuate that transaction by entering into an offsetting transaction with one of IB's affiliates, with another customer that enters quotes into IB's system, or with a third party bank (IB's “Forex Providers”). In such transactions, the Forex Provider is not acting in the capacity of a financial adviser or fiduciary to Customer or to IB, but rather, is taking the other side of IB's offsetting trade in an arm's length contractual transaction. Customer should be aware that the Forex Provider may from time to time have substantial positions in, and may make a market in or otherwise buy or sell instruments similar or economically related to, foreign currency transactions entered into by Customer. IB's Forex Providers may also undertake proprietary trading activities, including hedging transactions related to the initiation or termination of foreign exchange transactions with IB, which may adversely affect the market price or other factors underlying the foreign currency transaction entered into by Customer and consequently, the value of such transaction.
H. Prices on the IB Forex Platforms: The prices quoted by IB to Customers for foreign exchange transactions on IB's IdealPro platform will be determined based on Forex Provider quotes and are not determined by a competitive auction as on an exchange market. Prices quoted by IB for foreign currency exchange transactions therefore may not be the most competitive prices available. For purposes of maintaining adequate scale and competitive spreads, a minimum size is imposed on all IdealPro orders (USD $25,000 as of December 2016 but this is subject to change at any time). Orders below the minimum size are considered odd lots and limit prices for these odd lot-sized orders are not displayed through IdealPro. Retail leveraged forex orders for odd lot-sized orders are generally executed within 1 pip of the best bid and best offer of the Interbank spread (NBBO). However, if the best quote for such orders is more than 1 pip outside of the NBBO, IB will generally route the order to execute against a bank or dealer bid or offer regardless of the order size in order to get an improved price. Customers may also enter a Request for Quote ("RFQ") on the system. IB will charge transaction fees as specified by IB for foreign currency exchange transactions. IB's Forex Providers will try to earn a spread profit on transactions with IB (differential between the bid and ask prices quoted for various currencies).
I. Price Slippage; Order Cancellation and Adjustment: Prices quoted on IB's system generally reflect the prices at which IB's Forex Providers are willing to trade. Prices quoted on IB's system reflect changing market conditions and therefore quotes can and do change rapidly. As such, when a Customer order is received and processed by IB's system, the quote on IB's platform may be different from the quote displayed when the order was sent by Customer. This change in price is commonly referred to as “slippage.” IB generally will not execute a Customer order at a certain price unless IB is able to trade at that price against one of IB's Forex Providers.
If Customer sends an order for a forex transaction to IB's system but Customer's requested price is no longer available and therefore the order is non-marketable, IB will not execute the order then but will place it in IB's limit order book in accordance with Customer's time-in-force instructions. Other customers can then trade against this order when it becomes the National Best Bid and Offer (“NBBO”) or IB may execute the order if it becomes marketable based on prices received from IB's Forex Providers.
If Customer sends an order for a forex transaction to IB's system and the current price is more favorable for Customer than what Customer requested in the order, the order will generally be executed at the available better price.
Although IB attempts to obtain the best price for Customer orders on forex transactions, because of the inherent possibility of transmission delays between and among Customers, IB and Forex Providers, or other technical issues, execution prices may be worse than the quotes displayed on the IB platform.
To execute your order, Interactive Brokers engages in back-to-back transactions with one or more counterparties. These counterparties on occasion may cancel or adjust forex trades with us in the event of market or technical problems. In these cases we may have to cancel or adjust forex trades that you have executed.
J. Other Risks: There are other risks that relate to trading foreign investment products and trading foreign currencies that cannot be described in detail in this document. Generally, however, foreign securities, options, futures and currency transactions involve exposure to a combination of the following risk factors: market risk, credit risk, settlement risk, liquidity risk, operational risk and legal risk. For example, there can be serious market disruptions if economic or political or other unforeseen events locally or overseas affect the market. Also, the settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets. In addition to these types of risk there may be other factors such as accounting and tax treatment issues that Customers should consider.
(1)Information regarding the performance of Interactive Brokers retail forex customers for the past 5 years is available upon request.
RISK DISCLOSURE STATEMENT
The risk of loss in trading commodity futures contracts can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should be aware of the following points:
ALL OF THE POINTS NOTED ABOVE APPLY TO ALL FUTURES TRADING WHETHER FOREIGN OR DOMESTIC. IN ADDITION, IF YOU ARE CONTEMPLATING TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS, YOU SHOULD BE AWARE OF THE FOLLOWING ADDITIONAL RISKS:
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF THE COMMODITY MARKETS.
Risk Disclosure Statement for Futures and Options
This brief statement does not disclose all of the risks and other significant aspects of trading in futures and options. In light of the risks, you should undertake such transactions only if you understand the nature of the contracts (and contractual relationships) into which you are entering and the extent of your exposure to risk. Trading in futures and options is not suitable for many members of the public. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances.
ADDITIONAL RISKS COMMON TO FUTURES AND OPTIONS
DEPOSITED CASH AND PROPERTY
COMMISSION AND OTHER CHARGES
TRANSACTIONS IN OTHER JURISDICTIONS
In accordance with Rules 15.05 and 21.03 of the Commodity Futures Trading Commission ("CFTC"), 17 C.F.R. §§15.05 and 21.03, Interactive Brokers is required to notify you that we are considered to be your agent for purposes of accepting delivery and service of communications from or on behalf of the CFTC regarding any commodity futures contracts or commodity option contracts which are or have been maintained in your account(s) with us.
In the event that you are acting as agent or broker for any other person(s), we are also considered to be their agent, and the agent of any person(s) for whom they may be acting as agent or broker, for purposes of accepting delivery and service of such communications. Service or delivery to us of any communication issued by or on behalf of the CFTC (including any summons, complaint, order, subpoena, special call, request for information, notice, correspondence or other written document) will be considered valid and effective service or delivery upon you or any person for whom you may be acting, directly or indirectly, as agent or broker.
You should be aware that Rule 15.05 also provides that you may designate an agent other than Interactive Brokers. Any such alternative designation of agency must be evidenced by a written agency agreement which you must furnish to us and which we, in turn, must forward to the CFTC. If you wish to designate an agent other than us, please contact us in writing. You should consult 17 C.FR. § 15.05 for a more complete explanation of the foregoing.
Upon a determination by the CFTC that information concerning your account(s) with us may be relevant in enabling the CFTC to determine whether the threat of a market manipulation, corner, squeeze, or other market disorder exists, the CFTC may issue a call for specific information from us or from you. In the event that the CFTC directs a call for information to us, we must provide the information requested within the time specified by the CFTC. If the CFTC directs a call for information to you through us as your agent, we must promptly transmit the call to you, and you must provide the information requested within the time specified by the CFTC. If any call by the CFTC for information regarding your account(s) with us is not met, the CFTC has authority to restrict such account(s) to trading for liquidation only. You have the right to a hearing before the CFTC to contest any call for information concerning your account(s) with us, but your request for a hearing will not suspend the CFTC's call for information unless the CFTC modifies or withdraws the call. Please consult 17 C.F.R. §21.03 for a more complete description of the foregoing (including the type of information you may be required to provide).
Certain additional regulations may affect you. Part 17 of the CFTC Regulations, 17 C.F.R. Part 17, requires each futures commission merchant and foreign broker to submit a report to the CFTC with respect to each account carried by such futures commission merchant or foreign broker which contains a reportable futures position. (Specific reportable position levels for all futures contracts traded on U.S. exchanges are established in Rule 15.03.) In addition, Part 18 of the CFTC Regulations, 17 C.F.R. Part 18, requires all traders (including foreign traders) who own or control a reportable futures or options position and who have received a special call from the CFTC to file certain reports with the CFTC, including, but not limited to, a Statement of Reporting Trader (Form 40). Please consult 17 C.F.R. Parts 17 and 18 for more complete information with respect to the foregoing.
This Day Trading Risk Disclosure Statement is being provided to you in the event your Interactive Brokers (IB) margin account becomes, or already is, classified as a Pattern Day Trader account. As required by current SEC and SRO rules and regulations, IB will classify an account that effects three (3) day trades within a five (5) day period as a Pattern Day Trader account. (A day trade is a buy and sell of the same security on the same day). The regulations prohibit IB from permitting a Pattern Day Trader account from effecting any transactions unless such account maintains a Minimum Equity Requirement of at least $25,000.
You should consider the following points before engaging in a day-trading strategy. For purposes of this notice, a "day-trading strategy" means an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities.
Day trading can be extremely risky. Day trading generally is not appropriate for someone of limited resources and limited investment or trading experience and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.
Be cautious of claims of large profits from day trading. You should be wary of advertisements or other statements that emphasize the potential for large profits in day trading. Day trading can also lead to large and immediate financial losses.
Day trading requires knowledge of securities markets. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. You should have appropriate experience before engaging in day trading.
Day trading requires knowledge of a firm's operations. You should be familiar with a securities firm's business practices, including the operation of the firm's order execution systems and procedures. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity. The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to systems failures.
Day trading will generate substantial commissions, even if the per trade cost is low. Day trading involves aggressive trading, and generally you will pay commission on each trade. The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings. For instance, assuming that a trade costs $16 and an average of 29 transactions are conducted per day, an investor would need to generate an annual profit of $111,360 just to cover commission expenses.
Day trading on margin or short selling may result in losses beyond your initial investment. When you day trade with funds borrowed from a firm or someone else, you can lose more than the funds you originally placed at risk. A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account. Short selling as part of your day-trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.
Potential Registration Requirements. Persons providing investment advice for others or managing securities accounts for others may need to register as either an "Investment Advisor" under the Investment Advisors Act of 1940 or as a "Broker" or "Dealer" under the Securities Exchange Act of 1934. Such activities may also trigger state registration requirements.
Customers trading equity options understand and agree to the following:
1. Manipulative Trading: It is a violation of exchange rules for a customer, acting alone or in concert with others, to engage in manipulative trading, including trading designed to unlawfully influence the price or volume of an instrument, and trading without a bona fide investment or hedging or speculative purpose. Manipulative trading includes, but is not limited to: “wash sales”, “matched orders”, “painting the tape”, ”spoofing/small-lot baiting” (sending an order to an exchange in order unlawfully to manipulate the execution price of a separate order on that exchange or on another exchange), “marking the close” (sending an order to influence the price of an instrument near the close of trading) and sending orders whose primary purpose is the collection of rebates or payment for order flow rather than investment or trading of the relevant instrument.
2. Pre-Arranged Trading, Block Trading, Crossing and Facilitation: Exchange rules govern the circumstances and procedures under which customers can seek to trade against each other, including pre-arranged trading, block trading, crossing trades, facilitation trades and solicitation trades. Customer must review relevant exchange rules before seeking intentionally to trade against another person or entity. See e.g., ISE Rules 716 (Block Trades), 717 (Limitations on Orders), and 723 (Price Improvement Mechanism for Crossing Transactions); CME Rule 539 (Prearranged, Pre-Negotiated and Noncompetitive Trades Prohibited); CBOT Rule 539 (Prearranged, Pre-Negotiated and Noncompetitive Trades Prohibited) and ICE Futures U.S. Rules 4.06 (Exchange for Related Positions) and 4.07 (Block Trading).
3. Improper Market Making: It is a violation of U.S. option exchange rules and American Stock Exchange ETF rules for a customer effectively to act as a market maker by holding itself out as willing to buy and sell securities on a regular or continuous basis. In determining whether a customer effectively is operating as a market maker, the exchanges will consider, among other things, the simultaneous or near-simultaneous entry of limit orders to buy and sell the same security; the multiple acquisition and liquidation of positions in the security during the same day; and the entry of multiple limit orders at different prices in the same security.
4. Order Designation: It is a violation of exchange rules to transmit an order for a broker-dealer account or an account in which a broker-dealer has a beneficial ownership interest unless such order is properly marked as a broker-dealer order. Users of the IB system cannot transmit broker-dealer orders with a "customer" designation.
BY OPENING AN IB ACCOUNT AND USING THE IB SYSTEM, CUSTOMERS REPRESENT THAT THEY WILL CONDUCT THEIR TRADING IN ACCORDANCE WITH EXCHANGE RULES.
Interactive Brokers ("IB") is furnishing this document to you to provide information about the manner in which stop and stop-limit orders that you submit to Interactive to buy or sell stocks and warrants will be managed.
The U.S. Securities & Exchange Commission (the "SEC") has stated that a stop order, also referred to as a "stop-loss order", is "an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price. A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own."
The SEC has described a stop-limit order as "an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better)."
IB offers its customers several ways to submit stop and stop-limit orders in stocks and warrants. On most exchanges, Interactive implements and manages stop (or stop-limit) orders in the firm's systems, submitting market (or limit) orders to the exchange when the customer-specified trigger price has been reached and passed. On some exchanges, Interactive may submit stop and/or stop-limit orders using the exchange's native order type. For each exchange on which a customer may trade, Interactive specifies on the Interactive Brokers website whether stop and stop-limit orders are managed (i.e., "simulated") by IB or submitted using the exchange's native order type. (This information is available under "Order Type" on the page on the IB website concerning each exchange.)
For stop and stop-limit orders that IB simulates, the order will be triggered and a market (or limit) order will be submitted for execution when the following occurs (unless the customer specifies otherwise when submitting the order):
These additional requirements are subject to change, including the leeway percentage of 0.5% outside of the consolidated bid/ask for the stock. Please check the IB website for the most current information.
Interactive also allows customers to customize the manner in which their stop and stop-limit orders are triggered. Customers may change the trigger method to include or exclude certain trigger criteria (e.g., last price, bid/ask, midpoint of bid/ask, regular trading hours only, etc.) based on the customer's specific trading objectives. Information on how to customize the trigger methodology for stop and stop-limit orders is provided on the Interactive Brokers website and in the IB Trader Workstation User's Guide.
Important notes concerning stop and stop-limit orders:
As described in the Options Clearing Corporation (“OCC”) Publication "Characteristics and Risks of Standardized Options", the OCC assigns exercise notices to clearing firms such as Interactive Brokers LLC (“IB LLC”), [the US-located affiliate of Interactive Brokers (U.K.) Limited (“IB UK”) and Interactive Brokers Canada, Inc. (“IBC”) that arranges for the execution and clearing of IB UK and IBC customer trades] using a specified assignment procedure. IB LLC, in turn, is required to maintain a procedure to allocate such exercise notices to those customer accounts carried by IB LLC that hold short positions in the relevant options. Upon assignment, customers whose accounts are carried by IB LLC shall be required: (1) in the case of an equity option, to deliver or accept the required number of shares of the underlying security, or (2) in the case of an equity index option, to pay or receive the settlement price, in cash. Customer understands that it may not receive notice of an assignment until one or more days following the date of the initial assignment by OCC to IB LLC and that the lack of such notice creates a special risk for uncovered writers of physical delivery call stock options.
Described below are IB LLC’s procedures for allocation of exercise notices, which are based on a random selection process:
(Note: the IB System will generate a new Random Number for each lottery to be run.)
Assume there are 1186 options contracts held at OCC for 10 customers and that 50 contracts are assigned to IB LLC by OCC.
1. Assign sequence numbers to each security:
|Assigned Sequence Numbers|
|Customer Accounts||No of Contracts held at OCC||1st Range||2nd Range|
|Total in OCC||1186|
2. FIND A STARTING RANDOM NUMBER BETWEEN 0001 AND 1186 using the Oracle random number generator.
3. ASSUMING THE RANDOM NUMBER GENERATED WAS 0396, ALLOCATE THE 50 CONTRACTS TO CUSTOMERS STARTING AT CONTRACT NUMBER 0396.
SUMMARY OF ALLOCATION
|Customer Accounts||No of Contracts Held at OCC||Allocation of Assigned Options Contracts|
|Total at OCC||1186||50|
Pre-arranged trading results when a discussion is held by market participants prior to trade execution to ensure that a contra party will take the opposite side of a particular order. U.S. futures exchanges, including, but not limited to, CME, CBOT, NYMEX, ICE-US, CFE, OneChicago and Nasdaq OMX Futures have regulations regarding the execution of pre-arranged trades. Interactive Brokers customers are responsible to know and abide by ALL exchange restrictions regarding pre-arranged trading. Interactive Brokers customers should not engage in pre-arranged trading unless such transactions are permitted by the relevant exchange. Customers should review the rules of each exchange to determine whether, and under what circumstances, such transactions are permitted. For your reference, various exchange rulebooks can be found at the following websites:
CME, CBOT, NYMEX
ICE Futures U.S.
Nasdaq OMX Futures
This information is being provided to you by Interactive Brokers (“IB”) to ensure that you understand the risks inherent in trading security futures and also so that you understand how your security futures account is being handled by IB. You must review this document carefully and sign it at the bottom in order to be approved to trade security futures products through IB.
You should be aware that security futures are highly leveraged investments and the risk of loss in trading these products can be substantial. Security futures are not suitable for all investors and you must carefully review this document and consult with a financial advisor, if necessary, to determine whether to trade security futures. IB does not provide any investment advice or recommendations, and you will be solely responsible for decisions regarding the security futures trading conducted in your account.
II. Nature of Your Security Futures Account
Under the federal regulations that apply to security futures, security futures positions may be held in a securities trading account subject to Securities and Exchange Commission (SEC) regulations or in a commodities trading account subject to Commodity Futures Trading Commission (CFTC) regulations.
Because IB is fully registered with both the SEC and the CFTC, IB offers both securities accounts and commodities accounts. Most securities futures products are held in an IB securities account and are subject to SEC customer protection rules. However, certain securities futures products are held in a commodities account and are therefore subject to CFTC customer protection rules. Additional information regarding whether a particular securities future product is held in a securities or commodities account may be found on IB's website.
The types of protections offered to investors for securities and commodities accounts are different. The different protections available to securities accounts and commodities accounts are described in Section 6 of the FINRA/NFA Standardized Risk Disclosure for Security Futures Contracts, discussed below.
III. Standardized Risk Disclosure for Security Futures Contracts
The National Futures Association (NFA) and the Financial Industry Regulatory Authority (FINRA) have jointly prepared a Standardized Risk Disclosure for Security Futures Contracts. It contains valuable information regarding trading of security futures contracts and you should review it carefully before investing in security futures.
To review the FINRA/NFA Standardized Risk Disclosure for Security Futures Contracts, click here.
NOTE: Viewing the Standardized Risk Disclosure requires Adobe Acrobat. To download Adobe Acrobat, click here. If you wish to receive a hard copy of the disclosure, call IB Customer Service at (877) 442-2757.
IV. Supplemental Agreement for Security Futures Trading
The Supplemental Agreement provisions below relate to security futures trading in Customer’s IB account and are in addition to the terms and conditions of the IB Customer Agreement, and the Customer Agreement is incorporated herein by reference.
By signing below, Customer acknowledges and agrees to the following:
THIS DISCLOSURE STATEMENT DISCUSSES THE CHARACTERISTICS AND RISKS OF TRADING BONDS THROUGH INTERACTIVE BROKERS (IB). BEFORE TRADING BONDS YOU SHOULD CONSIDER CONSULTING A FINANCIAL ADVISOR, WHO CAN PROVIDE ADVICE ON WHETHER PARTICULAR INVESTMENTS SUIT YOUR FINANCIAL GOALS.
IB MERELY PROVIDES EXECUTION AND CLEARING SERVICES AND DOES NOT PROVIDE SPECIFIC TRADING OR INVESTMENT ADVICE. IB WILL NOT MONITOR YOUR TRADES AND INVESTMENTS TO DETERMINE IF THEY ARE APPROPRIATE FOR YOUR FINANCIAL NEEDS.
BEFORE TRADING ANY PARTICULAR BOND, YOU SHOULD UNDERSTAND THE EXACT TERMS AND CONDITIONS OF THE BOND, INCLUDING ITS CREDIT RATING, ITS MATURITY, ITS RATE AND YIELD, WHETHER IT IS CALLABLE, AND OTHER RELEVANT INFORMATION.
More information on bond trading can be found on the following website sponsored by the Securities Industry and Financial Markets Association: www.investinginbonds.com.
Section 1 –Characteristics of Bonds
1.1 –What is a bond?
A bond is a type of interest-bearing or discounted security usually issued by a government or corporation that obligates the issuer to pay the holder an amount (usually at set intervals) and to repay the entire amount of the loan at maturity. It is another way for the issuer to generate money as opposed to issuing stock.
1.2 –What are the types of bonds?
A. U.S. Government Bonds
Bonds issued by the U.S. government are called Treasuries. These are grouped into three categories: (1) Treasury bills; (2) Treasury notes; and (3) Treasury bonds. They each have a different length of time until maturity. Income earned on Treasuries is exempt from state and local taxes, but taxable by the federal government. Treasuries are considered to be the safest bond investments since the U.S. government backs them and it is highly unlikely that a situation of default will occur. However, Treasuries with long maturities have more potential for inflation and credit risk.
B. Municipal Bonds
Municipal bonds are debt obligations of state or local governments. The funds may be used to support general governmental needs or special projects. Municipal bonds are considered riskier investments than Treasuries, but they are exempt from taxing by the federal government and local governments often exempt their own citizens from taxes on their bonds. However, municipal bonds often have a lower coupon rate because of the tax break.
C. Corporate Bonds
Corporate bonds are debt instruments issued by private corporations. They usually have four distinguishing characteristics: (1) they are taxable; (2) they usually have a par value of $1000; (3) they have a term maturity (they become due all at once) and are paid for out of a sinking fund for that purpose; and (4) they are traded on major exchanges with prices published in newspapers. Corporate bonds come in various maturities. They are considered the riskiest of the bonds because there is much more of a credit risk with corporate bonds, but this usually means that the bondholder will be paid a higher interest rate. Corporations with low credit ratings issue bonds too, and these are speculative products called junk bonds.
Par value, or face amount, is usually $1000, but bond prices are quoted on $100. For example, a quote of 80 is a bond selling for $800. Amounts less than $10 are quoted in eighths ($1.25). Therefore, a quote of 80 1/8 is equal to $801.25.
Convertible Bonds are bonds that may be converted into another form of corporate security, usually shares of common stock. Conversion only occurs at specific times at specific prices under specific conditions and this will all be detailed at the time the bond is issued.
D. Zero-Coupon Bonds
These are bonds that do not pay interest periodically, but instead pay a lump sum of the principal and interest at maturity. Investors, however, must pay taxes on the interest as it accrues, not when they receive it.
1.3 –Bond Ratings
Standard & Poor’s and Moody’s Investors Service assign credit ratings to governments and corporations which help determine the amount of interest paid. The ratings for bonds are in the chart below. The ratings represent greater default risk as you read down the chart (see Section 2 for credit and other risks associated with bonds).
|Quality||Moody’s||Standard & Poor’s|
|Junk Bonds/Speculative/High Yield||Ba, B, Caa, Ca||BB, B, CCC, CC|
Bond ratings are subject to change by factors that affect the company’s credit.
The ratings that appear for the bonds IB offers are from sources IB believes to be reliable; however, IB cannot guarantee their accuracy.
Section 2 –General Risks of Bond Trading
Trading bonds may not be suitable for all investors. Although bonds are often thought to be conservative investments, there are numerous risks involved in bond trading. If you are uncomfortable with any of the risks involved, you should not trade bonds.
There is a credit risk involved with trading bonds. When you purchase a corporate bond, you are lending money to a company. There is always the risk that the issuer will go bankrupt. If this happens, you will not receive your investment back. This is a risk of which you must be aware. Credit risk is figured into the pricing of bonds.
There is a prepayment risk involved. Prepayment risk involves the scenario where an issuer “calls” a bond. If this happens, your investment will be paid back early. Certain bonds are callable and others are not, and this information is detailed in the prospectus. If a bond is callable, the prospectus will detail a “yield-to-call” figure. Corporations may call their bonds when interest rates fall below current bond rates.
A “put” provision allows a bondholder to redeem a bond at par value before it matures. Investors may do this when interest rates are rising and they can get higher rates elsewhere. The issuer will assign specific dates to take advantage of a put provision. Prepayment risk is figured into the pricing of bonds.
There is a significant inflation risk when trading bonds. Inflation risk is the risk that the rate of the yield to call or maturity of the bond will not provide a positive return over the rate of inflation for the period of the investment. In other words, if the rate of inflation for the period of an investment is six percent and the yield to maturity of a bond is four percent, you will receive more money in interest and principal than you invested, but the value of that money returned is actually less than what was originally invested in the bond. As the inflation rate rises, so do interest rates. Although the yield on the bond increases, the price of the actual bond decreases. This is a risk of which you must be aware.
There is an interest rate risk associated with bonds. Changes in interest rates during the term of any bond may affect the market value of the bond prior to call or the maturity date.
Section 3 –Risks of Trading Bonds Electronically
IB is an online, direct access brokerage firm that executes virtually all trades on electronic market centers. IB will post bids and offers for bonds from various information sources and markets and will allow you to execute trades against those electronically-displayed bond quotes.
Unlike the practice of many other brokers, IB will not make telephone calls to various bond dealers in seeking to execute your bond orders. Rather, IB will provide you with direct access to electronic bond trading platforms.
Electronic trading has a number of inherent advantages (such as speed, low cost, and a clear audit trail) but it also has certain inherent disadvantages. You should be aware that electronic bond trading platforms may have less liquidity or less advantageous prices than could be offered telephonically by a bond dealer. In addition, electronic trading platforms are inherently vulnerable to technical errors and outages.
Please note that many bond dealers place quotes to buy or sell the same bond position on multiple bond trading venues (e.g., 10 bonds on Market A and 10 bonds on Market B). If an IB customer order executes against both of the quotes (e.g., an order to buy 20 is filled 10 at Market A and 10 at Market B), the dealer may request that one of the trades be busted (reversed). IB reserves the right to grant such requests without consent of customer if IB, in its discretion, believes that the dealer is acting in good faith.
Section 4 –Margin
When a broker-dealer lends a customer part of the funds needed to purchase a security such as a bond, the term “margin” refers to the amount of cash, or down payment, the customer is required to deposit. Bonds, like equity securities, may be traded on margin. Trading on margin is inherently more risky than trading in fully-paid-for securities. For risks associated with margin trading, please see Interactive Brokers LLC’s “DISCLOSURE OF RISKS OF MARGIN TRADING.”
Section 5 –Commissions and Mark-Ups
You will be charged a commission for bond trades executed through IB. IB may execute your bond trade through or against an affiliate of IB (such as Timber Hill LLC or another affiliate), which may charge a markup on trades such affiliate executes as principal against your bond order.
On the Settlement Date, the buyer must pay to seller only the agreed upon price, without any payment in respect of interest. The person holding the bond on the Record Date receives any and all interest payments whenever made. If a Record Date occurs before the Settlement Date, seller will get any interest paid on a bond that is trading Flat. If there is a change in the Record Date, the party that was a bondholder with respect to the prior Record Date loses any rights they may have had to receive any related payment of principal or interest.
If a bond that was sold with accrued interest begins trading Flat after the trade date but before Settlement date, the buyer remains responsible for paying the accrued interest to the seller, even though the buyer may not receive interest from the bond issuer. If the accrued interest payment is not made on the actual Payment Date, but is made during the Grace Period, any Interest payments will accrue to the seller. If Accrued Interest is paid after the Grace Period, it will belong to the buyer when paid.
Bankruptcy courts can issue broad orders at the request of a bankruptcy debtor that halt or seriously restrict trading in all of the debt and equity of the debtor corporation for the protection of the bankruptcy debtor's net operating loss ("NOL") carryovers and other tax attributes of the debtor.
"Minimum denomination transfer requirements" are generally found in the Indenture and the offering documents and provide that a transfer of a bond whether in physical or book-entry form be made in certain minimum denominations.
Important Information Regarding Mutual Funds
Interactive Brokers ("IB") is furnishing this disclosure to customers in order to provide additional information regarding the characteristics and risks associated with leveraged and inverse mutual funds and exchange traded funds ("ETFs"). In addition to providing this disclosure, IB strongly encourages customers to carefully review the fund's prospectus before investing in a specific fund.
As the name implies, leveraged mutual funds and ETFs seek to provide leveraged returns at multiples of the underlying benchmark or index they track. Leveraged funds generally seek to provide a multiple (i.e., 200%, 300%) of the daily return of an index or other benchmark for a single day excluding fees and other expenses. In addition to using leverage, these funds often use derivative products such as swaps, options, and futures contracts to accomplish their objectives. The use of leverage as well as derivative instruments can cause leveraged funds to be more volatile and subject to extreme price movements.
Inverse mutual funds and ETFs, which are sometimes referred to as "short" funds, seek to provide the opposite of the performance of the index or benchmark they track. Inverse funds are often marketed as a way to profit from, or hedge exposure to, downward moving markets. Some inverse funds also use leverage, such that they seek to achieve a return that is a multiple of the opposite performance of the underlying index or benchmark (i.e., -200%, -300%). In addition to leverage, these funds may also use derivative instruments to accomplish their objectives. As such, inverse funds are volatile and provide the potential for significant losses.
RISKS ASSOCIATED WITH LEVERAGED AND INVERSE FUNDS
Leveraged and inverse funds are complicated instruments that should only be used by sophisticated investors who fully understand the terms, investment strategy and risks associated with the funds. In particular, customers should be aware of certain specific risks involved in trading in leveraged and inverse funds. These risks include, but are not limited to:
Use of Leverage and Derivative Instruments: Many leveraged and inverse funds use leverage and derivative instruments to achieve their stated investment objectives. As such, these funds can be extremely volatile and carry a high risk of substantial losses. Such funds are considered speculative investments and should only be used by investors who fully understand the risks and are willing and able to absorb potentially significant losses.
Most Leveraged and Inverse Funds Seek Daily Target Returns: Most leveraged and inverse funds "reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis. Due to the effect of compounding, the return for investors who invest for a period different than one trading day may vary significantly from the fund's stated goal as well as the target benchmark's performance. This is especially true in very volatile markets or if a leveraged fund is tracking a very volatile underlying index. Investments in leveraged and inverse funds must be actively monitored on a daily basis and are typically not appropriate for a buy-and-hold strategy.
Higher Operating Expenses and Fees: Investors should be aware that leveraged funds typically rebalance their portfolios on a daily basis in order to compensate for anticipated changes in overall market conditions. This rebalancing can result in frequent trading and increased portfolio turnover. Leveraged and inverse funds will therefore generally have higher operating expenses and investment management fees than other funds.
Tax Treatment of Leveraged and Inverse Funds May Vary: In some cases, leveraged and inverse funds may generate their returns through the use of derivative instruments. Because derivatives are taxed differently from equity or fixed-income securities, investors should be aware that these funds may not have the same tax efficiencies as other funds.
Much of the information below is found on the Financial Industry Regulatory Authority ("FINRA ") website under the Investor Alert, "Municipal Bonds – Important Considerations for Individual Investors." For more information, please refer to this alert.
Municipal securities, or, "Muni bonds" are debt obligations of state or local governments. The funds may be used to support general governmental needs or special projects.
Municipal bonds are considered riskier investments than Treasuries, but municipal bond interest is exempt from being taxed by the federal government. In addition, local governments often exempt their own citizens from taxes on its bonds. However, municipal bonds often have a lower coupon rate because of the tax break.
Municipal bonds generally pay a specified amount of interest (usually semiannually) and return the principal to you on a specific maturity date.
There are two common types of municipal bonds:
General Obligation ("GO") Bonds - GO bonds are issued by states, cities or counties. They are backed by the “full faith and credit” of the government entity issuing the bonds. The creditworthiness of GO bonds is based primarily on the economic strength of the issuer's tax base.
Revenue Bonds – Revenue bonds are backed solely by fees or other revenue generated or collected by a facility, such as tolls from a bridge or road, or leasing fees. Bonds that are backed by a specific tax or assessment of a government entity, such as a tourist tax or other special tax or assessment, also are often considered to be revenue bonds. Unlike GO bonds, revenue bonds are not backed by the full faith and credit of the government entity issuing the bonds. Instead, the creditworthiness of revenue bonds depends on the financial success of the specific project they are issued to fund, on the revenues of a specific operational component of the government entity, or on the amounts raised by a specific tax or special assessment.
Historically, very few muni bonds have gone into default. But defaults can occur. Defaults tend to be higher for revenue bonds than for GO bonds—especially those that back private-use projects such as nursing homes, hospitals or toll roads.
Risk of Default
Evaluating Financial Condition
Defaults, while rare, do occur. One way to evaluate an issuer’s default risk is to evaluate its financial condition. When a muni bond issuer offers a new bond for sale, it usually discloses the details of the offering and information about its financial condition in the bond’s “official statement” (analogous to the prospectus used for corporate securities offerings). This information is typically updated each year—and also from time-to-time through “material events notices” concerning, for example, delinquency in principal and interest payments, other types of defaults, rating changes, events affecting the tax-exempt status of the bond, bond calls and other events. The Municipal Securities Rulemaking Board (“MSRB”) currently makes official statements, other ongoing muni bond disclosures, real-time trade pricing and up-to-date interest rate information available to the public for free through its Electronic Municipal Market Access (EMMA) Web site. This information is also available from IB.
Credit ratings can also help you evaluate a bond’s default risk. However, it is important to realize that these ratings are estimates only and should be only one of many factors in evaluating a municipal bond investment. Credit ratings can change at any time. A high credit rating is not a seal of approval and neither reflects nor guarantees stability of market value or liquidity. Conversely, a low credit rating may very well be a sign of a bond’s increased risk of default or an indicator of greater liquidity risk and price level risk. As such, a low credit rating should not be taken lightly. So-called “high yield” munis often have low credit ratings—the higher return is meant to compensate investors for the higher level of risk they incur.
Not all bonds have credit ratings. While an absence of a credit rating is not, by itself, a determinant of low credit quality, investors in non-rated bonds should be prepared to make their own independent credit analysis of the bonds.
Some muni bond issuers include a repayment protection feature - most often bond insurance - to insure their bonds at the time they are issued. A bond with insurance generally is able to come to market with a higher credit rating, making the bond more attractive to buyers, and at the same time lowering the issuing cost to the municipality. The protection can shield an investor from default risk to the extent that the protection provider promises to buy the bonds back or to take over payments of interest and principal if the issuer defaults. However, any guarantees are only as sound as the protection agent/insurance company that makes them. For this reason, when considering an insured bond, be sure to take into account the credit rating and long-term viability of the bond insurer. Following recent economic turmoil, the credit ratings of most bond insurers have been downgraded— and, in many cases, the current credit profile of the municipal bond issuer itself may now be higher than the current credit rating of the bond insurer.
Interest Rate Risk
Muni bonds are subject to interest rate risk, which is the risk that an increase in interest rates may reduce the market value of a bond you hold. Interest rate risk, also referred to as market risk, increases the longer you hold a bond. This is especially true if you purchase a bond when interest rates are at or near historically low rates.
The below information is available on the MSRB website in the MSRB Investor Brochure located at: http://msrb.org/msrb1/pdfs/MSRB-Investor-Brochure.pdf.
An investor who believes a dealer has been unfair or that MSRB rules or federal securities laws have been violated, may also file a complaint with the Securities and Exchange Commission, 100 F Street N.E., Washington, D.C. 20549.
COMPLAINTS ALSO MAY BE FILED WITH THE APPROPRIATE AGENCY LISTED BELOW.
For complaints against securities firms or individuals associated with securities firms:
FINRA Investor Complaint Center 9509 Key West Avenue
Rockville, MD 20850-3329
For complaints about dealers that are state banks that are not members of the Federal Reserve System:
FDIC Consumer Response Center
1100 Walnut Street, Box #11
Kansas City, MO 64106
(877) ASK-FDIC or email to firstname.lastname@example.org
For complaints about dealers that are state banks that are members of the Federal Reserve System:
For complaints about dealers that are national banks or savings associations:
Comptroller of the Currency Customer Assistance Group
1301 McKinney Street, Suite 3450
Houston, TX 77010
Anyone who wishes to communicate with the MSRB or obtain a copy of its rules may contact:
Municipal Securities Rulemaking Board
1300 i Street, NW, Suite 1000
Washington, DC 20005
The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a Congressionally- chartered, self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is subject to oversight by the Securities and Exchange Commission.
Rules Protecting Investors
A central purpose of MSRB rules is to protect investors that buy or sell municipal securities. The MSRB adopts rules that require brokers, dealers and municipal securities dealers ("dealers") to deal fairly with investors.
When a dealer recommends a municipal security, MSRB rules specifically require that the recommendation be suitable to the investor's financial situation and investment objectives. Advertisements about municipal securities must not be false or misleading.
In addition, before selling a municipal security to an investor, the dealer has a duty to assess and disclose material facts about a security that are generally available in official statements, continuing disclosures and other information made available through the MSRB's Electronic Municipal Market Access (EMMA) website, at http://emma.msrb.org. Dealers also have a duty to obtain and disclose information that is not available through EMMA, if it is material and available through other established sources.
A dealer must buy and sell a municipal security at a fair and reasonable price, based on its best judgment of the security's fair market value. MSRB rules, available on www.msrb.org, include standards of professionalism and fair practice, and the obligation of municipal securities dealers to fully understand bonds they sell as part of their disclosure, suitability and pricing obligations. No dealer may guarantee an investor against a loss on an investment in a municipal security.
After buying or selling a municipal security, the dealer must send a confirmation to the investor containing the identities of the parties to the transaction, a description of the security, the date of the sale, the security's price and yield, the capacity in which the dealer is acting, the existence of any call or put features and the availability of specific information about those features. Disclosure of material information typically will be provided by directing the investor to the MSRB's EMMA website, at http://emma.msrb.org, to access an electronic copy of the issuer's official statement. Investors may also request a printed copy of an official statement.
MSRB rules apply to municipal securities (including 529 plans) and not to unit investment trusts, bond funds or other, similar investment programs issued by investment companies. Municipal securities generally are defined as direct obligations issued by a state, county, city or any of their political subdivisions, such as a school district or a housing authority.
Investor Disputes with DealersAn investor who has a dispute with a dealer should try to resolve it with the sales representative or the representative's supervisor. If the dispute cannot be resolved, the investor may file a claim with the Financial Industry Regulatory Authority's arbitration program for possible restitution of an unfair monetary loss. Information about FINRA's arbitration program may be obtained by writing to FINRA at 1735 K Street, N.W., Washington, D.C., 20006, Attn: Dispute Resolution. The investor also may file a complaint with the regulatory agency that examines the dealer for compliance with MSRB rules, or contact the MSRB, which will forward the complaint to the appropriate enforcement agency.
Trading Certificates of Deposit (“CDs”), even those that are insured by the Federal Deposit Insurance Company (“FDIC”), has certain inherent risk. Please review and be aware of the following risk factors:
This disclosure contains additional important information regarding the characteristics and risks associated with trading small-cap (penny) stocks.
What is a "Penny" Stock?
Generally, penny stocks are low-priced shares of small companies that are not traded on an exchange or quoted on NASDAQ. Penny stocks generally are traded over-the-counter, such as on the OTC Bulletin Board or Pink Sheets, and are historically more volatile and less liquid than other equities. For these and other reasons, penny stocks are considered speculative investments and customers who trade in penny stocks should be prepared for the possibility that they may lose their entire investment, or an amount in excess of their investment if they purchased penny stocks on margin. Before investing in a penny stock, you should thoroughly review the company issuing the penny stock. In addition, you should be aware of certain specific risks associated with trading in penny stocks.
Risks Associated With Penny Stocks
There are a number of risks of trading penny stocks, including the following:
You Can Lose All or Much of Your Investment Trading Penny Stocks. All investments involve risk but penny stocks are among the most risky and are generally not appropriate for investors with low risk tolerance. Many penny stock companies are new and do not have a proven track record. Some penny stock companies have no assets, operations or revenues. Others have products and services that are still in development or have yet to be tested in the market. Penny stock companies therefore have a greater risk of failure and those who invest in penny stocks have a greater risk that they may lose some or all of their investment.
Lack of Publicly Available Information. Most large, publicly-traded companies file periodic reports with the SEC that provide information relating to the company's assets, liabilities and performance over time. In addition, these companies provide their financial information and operational results online. In contrast, information about penny stock companies can be extremely difficult to find, making them more likely to be the subject of an investment fraud scheme and making it less likely that quoted prices in the market will be based on full and complete information about the company.
No Minimum Listing Standards. Companies that offer shares of their stock on exchanges can be subject to stringent listing standards that require the company to have a minimum amount of net assets and shareholders. Most penny stock companies do not list their shares on exchanges and are not subject to these minimum standards.
Risk of Lower Liquidity. Liquidity refers to the ability of market participants to buy and sell securities. Generally, the more demand there is for a particular security, the greater the liquidity for that security. Greater liquidity makes it easier for investors to buy or sell securities so investors are more likely to receive a competitive price for securities purchased or sold if the security is more liquid. Penny stocks are often traded infrequently and have lower liquidity. You may therefore have difficulty selling penny stocks once you own them. Moreover, because it may be difficult to find quotations for certain penny stocks, they may be difficult, or even impossible, to accurately price.
Risk of Higher Volatility. Volatility refers to changes in price that securities undergo when they are being traded. Generally, the higher the volatility of a security, the greater its price swings. Due to their lower liquidity, penny stocks are subject to greater volatility and price swings. A customer order to purchase or sell a penny stock may not execute or may execute at a substantially different price than the prices quoted in the market at the time the order was placed. In addition, the market price of any penny stock shares you obtain can vary significantly over time.
Penny Stocks Can Be Subject to Scams. Penny stocks are frequent vehicles for scams and/or market manipulation due to their generally lower prices and less stringent listing requirements. You should be wary of advertisements, unsolicited e-mails, newsletters, blogs or other promotional reports that emphasize the potential for large profits in penny stocks generally or certain penny stocks. These promotional materials are often used to manipulate or "pump up" the price of penny stocks before selling a large volume of shares. Customers are therefore strongly encouraged to do their own due diligence with respect to any penny stock company they invest in and to not rely on any outside promotional reports or newsletters.
Further information concerning penny stocks and the risks involved in trading them is available on the SEC's website at http://www.sec.gov/investor/pubs/microcapstock.htm.
The Monetary Authority of Singapore has authorized Chicago Mercantile Exchange Inc. ("CME") as a recognized clearing house in Singapore. Interactive Brokers ("IB") is providing this risk disclosure to you regarding the clearing of products at CME.
Nothing included in this statement should be regarded as legal advice. Tax advisors, legal counsel and Exchange or Clearing House rules, as applicable, should be consulted in all cases if you have questions concerning the conduct of your business or the impact of U.S. law or regulation thereon.
The U.S. Securities & Exchange Commission (the "SEC") has provided investors with the following information concerning Auto-Trading on the SEC's website at http://www.sec.gov/investor/pubs/autotrading.htm:
All About Auto-Trading — If you subscribe, or are thinking about subscribing to, an investment newsletter service that offers "auto-trading," please read this investor alert. Investment newsletters market "auto-trading" programs as a way to receive quick execution of trades recommended by the investment newsletter. In an "auto-trading" program, you establish an account at a brokerage firm that has agreed to accept trading instructions from the investment newsletter. In order to allow "auto-trading" in your account, you must sign an agreement with the broker authorizing it to accept trading instructions directly from the investment newsletter and to execute trades in your account without first getting your permission. The broker will make trades in your account without consulting you about the price, the type of security, the amount and when to buy or sell.
"Auto-trading," like any other arrangement that allows someone else to trade in your account without first asking your permission, can be highly risky. Here are some steps you'll want to take to check out an auto-trading program, before you hand over any money:
Check Out the Newsletter — Find out whether the firm that's selling the investment newsletter is registered to do business as an investment adviser. You can do this by visiting the SEC website and clicking on the words " Check Out Your Broker or Adviser." Generally, the SEC considers firms that publish investment newsletters and that also engage in "auto-trading" to be investment advisers. If you cannot find proof that the firm is registered as an investment adviser, please let us know by using our online Center for Complaints and Enforcement Tips.
Independently Confirm Performance — Be wary of claims of superior performance, especially ones that rely upon "cherry picking" successful recommendations and ignoring those that generated losses. You'll want to see a complete track record of how the firm's recommendations fared over several months to evaluate whether it is living up to its promises. If the firm isn't willing to provide this information, think twice about entrusting your accounts and your money to them.
Steer Clear of Testimonials — Watch out if the investment newsletter's promotional materials, such as its website, contain "testimonials" from supposedly satisfied clients, especially if all the "testimonials" are full of praise. The SEC forbids registered investment advisers from advertising their services using testimonials.
Follow the Money — Find out whether the firm offering the investment newsletter is being paid by others to recommend particular stocks. This is particularly important because you are giving the firm the ability to make trades in your brokerage account without asking your permission. You'll want to evaluate any conflicts of interest they might have in making recommendations.
Fully Vet the Broker — Before you establish a brokerage account with the firm the newsletter recommends, be sure to thoroughly check out the disciplinary history of both the brokerage firm and any sales representative assigned to your account. You can do this by using FINRA's free BrokerCheck service and by calling your state securities regulator.
Be very wary if any firm claims to always make profits investing in the stock market, or if the firm claims to make extraordinarily high profits for customers. If it sounds too good to be true, it usually is! For more information on how to invest wisely and avoid costly mistakes, please visit the Investor Information section of our website.
Interactive Brokers LLC ("IB") offers eligible customers the ability to lend certain of their fully paid and excess margin securities to IB for on-lending to other IB customers or to other market participants who wish to use these shares for short selling or other purposes. "Fully-paid securities" are securities in your account that have been completely paid for. "Excess-margin securities" are securities that have not been completely paid for, but whose market value exceeds 140% of your margin debit balance. In this disclosure and in the relevant agreements, we collectively refer to fully-paid and excess margin securities as "Fully-Paid Securities" or "Fully-Paid Shares". Lending your Fully-Paid Shares may be a way to increase the yield on your portfolio, because some shares are in high demand in the securities lending market and borrowers are willing to pay for the use of your shares.
There are two ways to participate:
Basic Mechanics of a Fully-Paid Lending Transaction
When the lending transaction takes place, your securities will be removed from your account. In return, IB will deposit cash collateral into your account to secure the amount of the loan. The current industry convention for the collateral calculation with respect to U.S. stocks is to multiply the rounded security price times the number of shares by 102%. IB marks-to-market all positions nightly to reflect changes in security prices and makes corresponding adjustments to the collateral. IB reserves the right to adjust to U.S. industry convention should that change or to raise or lower the collateral amount based on local laws or market custom outside the United States; however IB will never collateralize the stock loan for less than 100% of the value. For example, customer A enrolled in the Stock Yield Enhancement Program and IB subsequently borrowed 5,000 shares of XYZ from this customer. XYZ's closing price is $22.15. The cash collateral is calculated by rounding $22.15 * 1.02 = $22.59 up to the nearest dollar, which is $23, making the collateral calculation $23 * 5000 = $115,000.
Whether you initiate the lending transactions yourself through a Self-Directed Fully-Paid Securities Lending Program, or you allow IB to borrow from you through the IB Stock Yield Enhancement Program, IB will be the counterparty borrower to all of the loans you make. That is, as a customer, you are not transacting directly with the securities lending market. You are transacting with IB, which may then transact on the relevant market. For all transactions in which you are lending your Fully-Paid Shares, IB will be responsible for providing the collateral to you on stock loans and paying interest on such collateral.
Securities Loaned Out By You May Not Be Protected by SIPC
The provisions of the Securities Investor Protection Act of 1970 may not protect you as a lender with respect to securities loan transactions in which you lend your Fully-Paid Securities to IB. Therefore, the collateral delivered to you (and indicated on your account statement) may constitute the only source of satisfaction of IB's obligation in the event that IB fails to return the securities.
Securities Loaned Out by You Are Typically Used to Facilitate Short Sales
The type of securities that are generally attractive to borrowers in the securities lending market, and which generate the highest income potential, are "hard to borrow" securities. When you lend your Fully-Paid Securities, it is likely that such securities will be used to facilitate one or more short sales where the borrower is selling shares in hopes that the stock will decline in value (the short seller later re-purchases the stock to pay back the stock loan). Since you are holding the shares "long" in your account, the activity of short sellers potentially could affect the long-term value of your holdings.
NOTE: If you do not want your fully-paid securities used to facilitate short sales, you should NOT participate in IB's Fully Paid Securities Lending Programs.
You Continue to Own Loaned Shares and Have Market Risk on Those Shares
When you lend your shares, you continue to own the shares and you continue to have the market exposure inherent in ownership of the shares (i.e., if the share price increases while you own the shares but are lending them out, your equity in the position will increase. If the price goes down, your equity will decrease).
You Continue to Own Loaned Shares and Have Market Risk on Those Shares
When you lend your shares, you continue to own the shares and you continue to have the market exposure inherent in ownership of the shares (i.e., if the share price increases while you own the shares but are lending them out, your equity in the position will increase. If the price goes down, your equity will decrease).
You Can Sell Your Loaned Shares At Any Time
Even though you have loaned your shares out, you can sell those shares at any time, just like any other shares in your IB account. You do not have to wait for the shares to be returned to sell them. Even if the shares are not returned on time to settle your sale of the shares, IB will be responsible for settling the sale, not you, and you will receive the proceeds from the sale of the shares on the normal settlement date for the sale.
Loan Rates (and therefore the Interest Rate You Will Receive) Are Subject to Frequent Change and Can Go Down (or Up) by 50% or More
Rates for "hard to borrow" and other shares change frequently, even daily, in the securities lending market and this can reduce (or increase) the interest IB pays on your collateral. Likewise, IB may change the rate it pays you compared to the income that IB receives when it lends your securities to third parties. If you have permitted IB to borrow your Fully-Paid Securities through the IB Stock Yield Enhancement Program, you will not have direct control over when to initiate or terminate loans of specific shares (including based on rate changes). However, you can always terminate your participation in the program (which will terminate all of your lending transactions) if you are unhappy with the interest rates you are receiving or the nature or frequency of rate changes. Please note, though, that if you terminate your participation in the Stock Yield Enhancement Program, you may not be permitted to re-join the program, or you may have to wait a certain length of time to re-join.
Potential Adverse Tax Consequences from Receiving Cash Payments in Lieu of Dividends on Loaned Shares 1
When you lend your Fully-Paid Securities, you are entitled to receive the amount of all dividends and distributions made on or in respect of the loaned securities. However, these cash payments may be considered "in lieu of" dividends. If you are a U.S. taxpayer, cash payments in lieu of dividends do not qualify for the same tax treatment as ‘qualified dividends’ and are taxed as normal ordinary income (up to 39.6%) instead of the preferential qualified dividend rate of 20% (U.S. federal income tax rates quoted here are for 2016 and are subject to change).
IB may be required to withhold tax on payments in lieu of dividends on U.S. and other country stocks and interest paid to you unless an exception applies. IB intends to treat the payments to you on the collateral under the program as interest although there can be no assurance the tax authorities will agree.
If you permit IB to borrow securities from you through the IB Stock Yield Enhancement Program and you are a U.S. taxpayer, IB may recall loaned shares from the borrower prior to a dividend, so as to reduce potential negative tax consequences to you. However, it is solely within IB's discretion to recall a loan and IB makes no guarantee it will recall a loan prior to a dividend. With respect to other corporate actions affecting loaned shares, non-cash distributions that you are entitled to receive in connection with ownership of loaned securities will be added to the loaned securities on the date of distribution and will be transferred to you at termination of the loan.
Special tax considerations may arise if shares of master limited partnerships or publicly traded partnerships are loaned out under the IB Stock Yield Enhancement Program or Self-Directed Fully-Paid Securities Lending Program. You are encouraged to consult the issuer's prospectus or your tax advisor for further information.
IB is the Counterparty to All Fully-Paid Lending Transactions with You. IB or Its Affiliates May Earn a Spread in Rates and May Profit or Lose in Connection with the Transaction or Other Transactions in the Same Securities. IB May Pay Part of the Loan Income to Third Parties, Which Will Reduce the Rate You Receive for the Duration of the Loan.
IB will be the counterparty (borrower) when you lend your shares. Any transactions that IB may or may not do with the shares are completely independent of your loan transaction to IB. Thus, after IB borrows shares from you, IB may or may not then lend those shares on in the marketplace, or lend them to or through an affiliate or third party. Likewise, IB may terminate a loan with you and return shares to you while at the same time IB continues to lend shares of the same stock out to the marketplace. In short: IB's obligation to you is to pay you interest on your cash collateral at the specified rate on ongoing loan transactions until such transactions are terminated by you or by IB. Nothing in the IB Fully-Paid Lending Program restricts IB's ability to conduct stock lending and borrowing transactions with third parties, who may profit or lose in connection with the transactions.
IB may borrow shares from you and then lend those shares to one of its affiliates for the affiliate's own purposes (including short selling). In the United States, IB typically also uses an affiliate as a "conduit" to the securities lending markets. This means that IB may lend the shares to the affiliate, which will then lend the shares out to other parties in the securities lending market.
IB or its affiliates or third parties may earn a "spread" on securities lending transactions with your stock. This means that the rate you receive from IB may be less than the rate IB or its affiliate receives from a third party (or that IB receives from the affiliate if the affiliate is the ultimate borrower) on those same shares. If IB's affiliate is acting as a conduit, there will be a minimum 5 basis point (0.05%) reduction in the interest rate you receive compared to market rates.
IB may pay part of the net loan income it earns on shares borrowed from you to third parties such as your financial advisor or introducing brokers who may introduce your account to IB. These payments may reduce the interest rate you receive for the entire duration of the loan.
There Is No Guarantee That You Will Receive the Best Loan Rates for Your Shares
The securities lending market is not a standardized or transparent market. Securities lending transactions generally take place "over the counter" rather than on organized exchanges where prices and transactions are transparent. There are no rules or mechanisms that guarantee or require that any given participant in the marketplace will receive the best rate for lending shares, and IB cannot and does not guarantee it will pay the highest rate for borrowing your shares. IB or its affiliates through which it conducts securities lending transactions may not have access to the markets or counterparties that are offering the most favorable rates, or may be unaware of the most favorable rates. As noted previously, IB or its affiliates or third parties may earn a "spread" on the rate, such that the rate you receive is worse than the rate IB or its affiliates receive.
There Is No Guarantee That Your Fully-Paid Shares Will Be Loaned Out
There is no guarantee that you will be able to lend (or that IB will want to or be able to borrow) your Fully-Paid Shares. There may not be a market to lend your Fully-Paid Shares at a rate that is advantageous, or IB may not have access to a market with willing borrowers. IB, or other IB customers or IB's affiliates, might have shares that may be loaned out that will satisfy available borrowing interest and, therefore, IB may not borrow shares from you. There is no rule or requirement, nor is there anything in the applicable agreements between you and IB, that requires IB to borrow shares from you or requires IB to place your interest in lending shares ahead of IB's own interests, or those of other IB customers or those of IB's affiliates. If IB is managing your lending transactions through the IB Stock Yield Enhancement Program, IB cannot and does not guarantee that all of your Fully-Paid Shares that possibly could be loaned out will be loaned out.
Loans May Be Terminated At Any Time By IB
When you lend your Fully-Paid Shares, the loan may be terminated and the shares returned to your IB account at any time for any reason. The loan may be terminated because a party that borrowed the shares from IB (after IB borrowed them from you) chose to return the shares, or because you or IB received a rerate request and rejected the rerate or did not respond to the rerate request. IB also has the right to terminate its borrowing of shares from you even if IB continues to lend the same stock through the securities lending market. When the loan is terminated, shares will be returned to your account, the cash collateral will be removed from your account and IB will stop paying interest on the collateral. If you permit IB to borrow securities through the IB Stock Yield Enhancement Program, you will not have direct control over when to initiate or terminate loans of specific shares. Please note, however, you can always terminate your participation in the program (which will terminate all of your lending transactions).
Selling Your Shares or Borrowing Against Them or Withdrawing Cash Collateral Beyond a Certain Amount Will Terminate the Loan Transaction
If you sell the Fully-Paid Shares you have lent out, or if you borrow against the shares or withdraw cash collateral (such that the securities become margin securities and are no longer fully-paid or excess margin securities), the loan will terminate and IB will cease paying interest on your cash collateral.
Commissions and Other Charges
If you permit IB to borrow securities from you through the IB Stock Yield Enhancement Program, IB will credit interest on your cash collateral daily. The rate may be changed from time to time in IB’s sole discretion and different rates may apply between customers based on a variety of factors, including the size of the customers' loan portfolios, the types of Fully-Paid Securities available in the customers' accounts, and other factors.
As noted above, IB or its affiliates or third parties may also earn a "spread" on the rate, such that the rate you receive will be based on a net income after deduction for charges by IB or its affiliates. If IB's affiliate is acting as a conduit, there will be a minimum 5 basis point (0.05%) reduction in the interest rate IB pays. Likewise, as noted, IB may pay part of the net income (for shares you lend) to third parties such as introducing brokers who may introduce your account to IB. These payments may reduce the interest rate you receive. You may always terminate your participation in the program if you are unhappy with the rates you are receiving.
Interest Treatment on Cash Collateral
The interest paid by IB under the program is the only interest payment you will receive on the cash collateral credited to your account when you lend Fully-Paid Shares to IB. The interest treatment on collateral may change from the above depending on the securities lending market and the collateral method. Please refer to the IB website.
The borrower of securities (and not you, as lender) has the right to vote, or to provide any consent or to take any similar action with respect to the loaned securities if the record date or deadline for such vote, consent or other action falls during the term of the loan.
IB does not provide any investment, tax or trading advice. The information in this paragraph is general information only and does not take into account your personal circumstances. You should speak to an independent tax expert to understand the tax implication to you (if any) as a result of participating in the program.
Introduction: Interactive Brokers ("IB") offers eligible customers the ability to borrow shares in advance of selling such shares short (a "pre-borrow" transaction). Please read the following disclosure carefully for important information about the pre-borrow program.
Basic Nature of Transaction: When you pre-borrow shares through IB, you will be engaging in a securities borrowing transaction with IB as your counterparty and you will be charged an interest rate each day for the borrowed shares. The interest rate may change as often as daily based on changes in market conditions, changes in demand for the shares in the securities lending market, and other factors.
All Borrow Rates Are Merely Indicative Until Confirmed on Daily Statement; Rates May Change Daily: IB may provide indicative interest rates for pre-borrows, but such rates are indicative only and may be higher or lower by a material amount than the actual rate that you will be charged if you borrow securities, which will be determined at or near the end of the trading day and is subject to change each day thereafter.
By using the IB Trader Workstation or other means to initiate a pre-borrow transaction, you are agreeing to borrow securities for at least one day and you are agreeing to pay whatever interest rate IB charges you in its sole discretion for the loan of the securities (i.e., your request to pre-borrow shares is similar to a “market order”). The rate for your loan will be determined by IB based on a number of factors, including but not limited to demand in the securities lending market, rates charged to IB by its counterparties and borrowing and lending activity by other IB customers. After you have requested a pre-borrow and IB has confirmed the loan to you of the shares during the trading day, IB may provide you with an indicative rate for the loan. Again, this rate is only indicative and the final interest rate is subject to change and will not be determined until at or near the end of the trading day. The interest rate for each day and transaction is not final until it is reported to you on your daily IB statement.
Return of Borrowed Shares: If you wish to return shares after you have borrowed them, you may do so beginning on the next trading day (you cannot return borrowed shares on the same day as the original pre-borrow). In order to return shares on a given day and terminate the borrowing costs, you must initiate a return of the shares by the cut-off time specified on the IB website or by 10:50 a.m. Eastern U.S. time, whichever is earlier.
Pre-Borrow Transactions And Short Sale Transactions Are Separate And Independent: When you pre-borrow shares, the transaction does not automatically involve a short sale of such shares. You must engage in a separate short sale trade to open a short position. Likewise, if you pre-borrow shares and then sell the shares short, and later you cover the short sale by purchasing shares, this will not automatically extinguish the borrow transaction. I.e., you will still be borrowing the shares and in order to return them and stop paying interest for borrowing them, you must separately initiate a return of the borrowed shares using the Trader Workstation or other means specified by IB. If, after pre-borrowing shares, you do not sell them short for settlement within 5 days of the pre-borrow, IB may, but is not required to, terminate the loan and return the shares.
If you have an existing short sale position and you subsequently pre-borrow shares of the same security, IB may, but is not required to, use the pre-borrow to support the existing short position (depending on when and if you engage in other short sales).
No Guaranteed Term for Borrows; Borrowed Shares Subject to Recall at Any Time: Pre-borrowing shares does not give you the right to keep the borrowed shares for any specific period of time. The loan can be terminated by IB at any time and the borrowed shares will be taken from your account and returned. Among other reasons, this may happen if IB's external stock loan counterparties demand the shares back from IB. If you have pre-borrowed shares and then sold the shares short and IB thereafter terminates your borrow, this will not automatically terminate your short position (IB will not necessarily buy-in the shares you sold short). IB may be able to continue to provide shares to support your short position. If you pre-borrow shares and the loan is later terminated and if IB cannot otherwise find shares to continue to support your short position, you short position will be subject to being bought-in.
Commissions and Interest Rates: In addition to the interest rate you pay for borrowing shares, you will be charged a commission (at the commission rate described on IB's website) for each pro-borrow transaction. While IB will attempt to provide competitive interest rates for your pre-borrow transactions, IB does not guarantee that the rate will be the most favorable rate available. When you pre-borrow shares, IB may lend you shares it has available or may engage in separate transactions with external stock loan counterparties to support the loan to you. In either instance IB and/or its affiliates may earn a profit and/or a spread over market interest rates on the loan of shares to you.
Borrowing charges will be applied to your account on the same day that you initiate a pre-borrow transaction. This is true even though a short sale of those same shares will not settle until three days after the trade date. Thus, pre-borrowing before a short sale will lead you to incur several extra days of interest charges for the borrowed shares compared to an ordinary short sale done without a pre-borrow.
No Voting Or Other Rights: You will not have the right to vote, or to provide any consent or to take any similar action with respect to securities you borrow even if the record date or deadline for such vote, consent or other action falls during the term of the loan.
SIPC May Not Protect Pre-Borrowed Shares Prior to a Short Sale: Prior to using pre-borrowed shares for a short sale, such shares may not be protected under the provisions of the Securities Investor Protection Act of 1970.
Financial Industry Regulatory Authority (“FINRA”) Conduct Rule 2267 requires that Interactive Brokers provide customers with certain information regarding its Public Disclosure Program. This information is included below:
Interactive Brokers LLC ("IBL") is required to inform its customers of the National Futures Association ("NFA") Background Affiliation Status Information Center ("BASIC"). The BASIC system compiles various information regarding registrants and anyone can access this system on the Internet.
The information in the BASIC system includes Commodity Futures Trading Commission ("CFTC") registration information and membership information from the NFA. Also included are regulatory and non-regulatory actions contributed by the NFA, the CFTC and the U.S. futures exchanges regarding futures-related activity.
The NFA BASIC system may be accessed at www.nfa.futures.org/basicnet/. To locate information on a registrant, simply enter the registrant's NFA ID number or name when prompted. For questions regarding this system, you may contact the NFA information center at 1-800-621-3570 between the hours of 8:00 a.m. to 5:00 p.m. Central Time.
IB provides electronic trade confirmations, account statements, tax information and other Customer records and communications (collectively, "Records and Communications") in electronic form. Electronic Records and Communications may be sent to Customer's Trader Workstation ("TWS") or to Customer's e-mail address, or for security purposes may be posted on the IB website and customer will need to log in and retrieve the Communication. By entering into this Agreement, Customer consents to the receipt of electronic Records and Communications. Such consent will apply on an ongoing basis and for every tax year unless withdrawn by Customer. Customer may withdraw such consent at any time by providing electronic notice to IB through the IB website. If Customer withdraws such consent, IB will provide required tax documents in paper form upon request by telephone or via the IB website. However, IB reserves the right to require Customer to close Customer's account.
In order to trade using the IB ("TWS"), and to receive Records and Communications through the TWS, there are certain system hardware and software requirements, which are described on the IB website at www.interactivebrokers.com. Since these requirements may change, Customer must periodically refer to the IB website for current system requirements. To receive electronic mail from IB, Customer is responsible for maintaining a valid Internet e-mail address and software allowing customer to read, send and receive e-mail. Customer must notify IB immediately of a change in Customer's e-mail address by using those procedures to change a Customer e-mail address that may be available on the IB website.
In accordance with Customer’s consent to receive Electronic Records and Communications electronically pursuant to the IB Customer Agreement, Customer hereby consents to receive all mutual fund documents and information, including, but not limited to, prospectus’, statements of additional information, periodic statements and proxy solicitation materials (collectively, “Mutual Fund Information”), in electronic form. Mutual Fund Information may be sent to Customers via e-mail, or for security purposes may be posted on the IB website or a secure third-party website with an e-mail notification sent to the Customer regarding how to access and retrieve such information. Customer consents to receiving mutual fund prospectuses electronically, including via e-mail containing a link to the prospectus. Customer’s consent with respect to Mutual Fund Information will apply on an ongoing basis and for every tax year unless withdrawn by customer. Customer may withdraw such consent at any time by providing electronic notice to IB through the IB website. If Customer withdraws such consent, IB will provide required Mutual Fund Information in paper form to Customer. However, IB reserves the right to require Customer to close Customer’s account.
Customer Consent to Reinvest Dividends/Capital Gains
In the event a mutual fund held in Customer's account makes a dividend or capital gain distribution, Customer hereby consents to such dividend or capital gain distribution being reinvested in the distributing mutual fund. Should the Customer's account no longer be open at the point of dividend payment or capital gain distribution, Customer hereby consents to having the account credited with the equivalent of such dividend or capital gain distribution in the form of cash.
At Interactive Brokers ("IB"), we understand that confidentiality and security of the personal information that you share with us is important. That is why we have developed specific policies and practices designed to protect the privacy of your personal information.
By opening an account with IB or by utilizing the products and services available through IB, you have consented to the collection and use of your personal information in accordance with the privacy notice set forth below. We encourage you to read this privacy notice carefully.
IB does not sell customer lists or customer email addresses to third party marketers.
In order to provide brokerage services and to comply with regulatory requirements,, IB collects certain personal, non-public information from you. This includes information:
We safeguard the confidentiality of your information in a number of ways. For example:
We do not disclose personal, nonpublic information to individuals or entities that are not affiliated with IB, except as provided by law. For example, among other reasons, we may disclose or report such information: where necessary to authorize, effect, administer, or enforce transactions that you request or authorize; to maintain and administer your account; to provide you with account confirmations, statements and records; to maintain appropriate archival records; where we believe that disclosure is required by applicable law, rules or regulations; to cooperate with law enforcement or regulatory or self-regulatory organizations; to enforce our customer and other agreements; to meet our obligations, or to protect our rights and property.
Finally, if you choose to subscribe to any of the Investors' Marketplace suite of third-party services that are provided through the IB website, we may disclose such information to the service providers as necessary for them to provide the services that you have requested. IB requires these service providers to enter into confidentiality agreements with IB that limit their use of the information that they receive. Such agreements prohibit the service provider from using IB customer information that they receive other than to carry out the purposes for which the information was disclosed.
If you have any questions about these policies, please contact IB Customer Service through the IB website at www.interactivebrokers.com/help.
In accordance with applicable regulations, Interactive Brokers LLC has developed a Business Continuity Plan to assist the firm in appropriately responding to a significant business disruption as promptly as possible under prevailing conditions. Among other things, IB's Business Continuity Plan:
In the event of a significant business disruption, IB intends to continue its operations to the extent reasonable and practical under the circumstances and will place utmost priority in re-establishing the data and operational systems necessary to provide its customers with prompt access to their funds and securities.
IB intends to respond to disruptions of particular scope as follows:
II. Branch Office Disruption
Basic Access to Funds and Securities in the Event of a Branch Office Disruption: Critical systems and personnel necessary to provide customers with access to their funds and securities generally are not dependent on operation of IB's branch offices (Chicago, London, Hong Kong and Zug, Switzerland). Thus, IB does not anticipate that even a significant disruption to the operations of a single IB branch office would have more than a temporary impact – if any – on customers' basic access to their funds and securities.
Connection to IB Trading System for Certain Customers: In the event of a significant disruption to certain branch offices, customers that connect to the IB online trading system (e.g., the IB Trader Workstation) through the branch office likely would temporarily lose the ability to connect to the trading system. This likely would last only briefly, as connections for these customers could be reestablished through other IB offices in as little as a matter of hours. Recovery time probably would be minimal (measured in hours or days). Customers would still have the ability to place trades by telephone during the temporary outage. Customers’ access to account functions other than trading (e.g., deposits and withdrawals, account management, etc.) likely would be unaffected, as connections for many internet based functions other than trading are not location-dependent.
We remind our customers that electronic and computer-based facilities and systems such as those provided by IB are inherently vulnerable to disruption, delay or failure. As specified in the IB Customer Agreement, customers must maintain alternative trading arrangements in addition to their IB accounts for the placement and execution of customer orders in the event that the IB system is unavailable.
Connection to Market Centers in Same Region as Branch: A significant disruption in a branch office could temporarily impact all IB customers’ ability to execute trades on market centers in the same geographic region of the branch office, because necessary communications lines or personnel could be affected. In this case, IB would strive to reconnect to affected markets from its Greenwich, CT headquarters, another branch office, or through a third party. Recovery time to restore some basic ability to trade on local markets probably would be minimal (measured in hours or days).
Other Branch Office Functions: Most important operations performed in IB branch offices, such as Customer Service, Account Application Processing, Compliance, etc. are also are performed in other IB offices and could be migrated to similarly-trained personnel in other branch offices promptly. Accordingly, IB does not anticipate that localized failures in a branch office would have a substantial negative impact on the firm's ability to respond to customer needs. Recovery time would be minimal.
III. Headquarters Disruption
In the Event of a Modest Disruption at IB’s Headquarters: IB has generally designed its systems, procedures and personnel structure such that there is significant redundancy and cross-capability. Limited disruptions affecting particular communications lines, particular pieces of computer hardware, or particular systems typically can be addressed quickly through use of redundant systems with similar capability. Likewise, the firm has significant capacity and capability in its branch offices, both in terms of systems and personnel, such that limited disruptions in particular areas at the firm’s headquarters may be ameliorated quickly.
In the Event of a Very Significant Disruption at IB’s Headquarters: IB's response to a very significant disruption at its headquarters necessarily will depend on the extent of the damage caused thereby. In the event of a total loss of IB’s headquarters, or the data processing center at its headquarters, IB intends to recover, at its Disaster Recovery Site(s), the relevant data and operational systems (e.g., trade and account data and modified versions of its market data, credit vetting and customer authentication capability) necessary to provide customers prompt access to their funds and securities. IB’s Disaster Recovery Site(s) are located in remote geographic locations that should not be subject to the same communications, electricity and/or transportation restrictions that may be experienced in the firm's Greenwich headquarters.
During the immediate aftermath period of, for example, a terrorist attack resulting in the destruction of the firm’s Greenwich headquarters, the firm does not anticipate that customers could continue to place new trades. IB anticipates that it could recover customer data and position information at its Disaster Recovery Site(s) and establish basic customer access to funds and positions within approximately 2 to 5 days of a total loss of its headquarters operations. Thus, while they could not trade, we anticipate that, within this 2 to 5 day window after the loss of the headquarters facility, customers would be able to request a withdrawal of funds or transfer of their positions to another broker whose operations were unaffected by, for example, the terrorist attack. Although IB’s Business Continuity Plan is designed to provide customer access to funds and securities within 2 to 5 days, the actual recovery time will depend on the nature of the disruption, how many IB facilities and personnel are affected, the state of the national and global financial and banking system, and a host of other factors.
In the event of a very significant disruption or total loss of IB’s headquarters facilities, IB anticipates that IB customers may be able to access either of the following websites: www.ibgdr.com or www.interactivebrokers.co.uk to obtain information about the extent of the disruption and the state of IB’s operations (assuming that the public internet remained available). Likewise, because most customer service personnel are in offices other than at IB headquarters, IB anticipates that customers would continue to be able to contact IB telephonically. Of course, in the event of a significant outage or major terrorist or other disaster affecting the markets, large numbers of customers likely would try to contact IB at the same time, potentially causing major delays.
Beyond the initial aftermath of a very significant disruption or total loss of the firm’s headquarters (i.e., in the time period after the first 5 days), the firm would evaluate the nature of the disruption, the availability of its systems and personnel, its financial condition, the condition of the national and global financial markets, and other factors, and the firm would determine whether to restore full brokerage operations or to discontinue brokerage operations and require its customers to transfer their accounts to another broker.
IV. City Wide Disruptions and Regional Disruptions
In the event of a significant city-wide or regional disruption in one of the cities in which an IB branch office is located, IB would follow the procedures described in Section II (Branch Office Disruption) above. Since no two IB branch offices are located in the same city or region, we expect that the disruption’s effects would be limited (see Section II above). In the event of a significant city-wide or regional disruption, affecting the firm’s Greenwich, CT headquarters IB would follow the procedures described in Section III (Headquarters Disruption). IB’s Disaster Recovery Site(s) are not located in the same city or region as the firm’s headquarters.
V. Important Disclaimers
IB will adhere to the procedures set forth in its Business Continuity Plan and described in this disclosure to the extent commercially reasonable and practicable under prevailing circumstances. However, there are innumerable potential causes of a business disruption. In addition, disruptions (and the events that caused them) may vary significantly in nature, size, scope, severity, duration and geographic location and will result in distinct degrees of harm to human life; firm assets; the banks, exchanges, clearing houses and depositories with which the firm conducts business; and local, regional and national systems infrastructure (e.g., telecommunications, Internet connectivity, power generation and transportation) that could affect the firm's recovery in vastly disparate ways. In recognition of this, IB reserves the right to flexibly respond to particular emergencies and business disruptions in a situation-specific manner which the firm deems prudent, in its sole discretion. Nothing in this document is intended to provide a guarantee or warranty regarding the actions or performance of IB, its computer systems, or its personnel in the event of a significant disruption.
IB may modify its Business Continuity Plan and this disclosure at any time. IB will post updates to its Business Continuity Plan Disclosure on its website. Should you wish to receive a copy of an updated disclosure by mail, please contact the IB Document Processing Department at email@example.com.
“Customers from Hong Kong” means IB customers who have indicated Hong Kong as their country of legal residence, mailing address, residential address or principal place of business.
Interactive Brokers Hong Kong Limited Suite 1512, Two Pacific Place
Admiralty, Hong Kong
Securities and Futures (Client Securities) Rules (Cap 571H, Laws of Hong Kong)Standing Authority
This letter of authority is in respect of my/our securities or securities collateral as set out below. Unless otherwise defined, all terms used in this letter of authority shall have the same meaning as in the Securities and Futures Ordinance (Cap 571, Laws of Hong Kong) and the Securities and Futures (Client Securities) Rules, as the same are amended from time to time.
This letter authorises you to:
You may carry out any or all of the above acts without giving me/us prior notice. I/We acknowledge that this authority shall not affect your right to dispose or initiate a disposal by your associated entity of my/our securities or securities collateral in settlement of any liability owed by or on behalf of me/us to you, the associated entity or a third person.
This authority is given to IB:
in consideration of its agreeing to continue to maintain securities cash and/or margin account(s) for me/us; and/
in consideration of its agreeing to continue to maintain futures account(s) for me/us; and
without prejudice to any other authority or rights which you, IB Group and/or any of its subsidiaries may have in relation to dealing in the Monies.
This authority is valid for a period of 12 months from the date of this letter.
This authority may be revoked by my/our giving you written notice (addressed to the Customer Service Department) sent to your address specified above. Such notice shall take effect upon the expiry of two weeks from the date of your actual receipt of such notice. I/we acknowledge that IB reserves the right to change the terms of the Financing Services at any time
I/We understand that this authority shall be deemed to be renewed on a continuing basis without my/our prior written consent if you issue me/us a written reminder of such proposed renewal at least 14 days prior to the expiry date of the then prevailing authority, and I/we do not object to such deemed renewal before such expiry date. Within one week after such expiry date, you will give me/us a written confirmation of any such renewal of this authority.
This letter has been provided to me/us in English and I/we understand and agree with the contents of this letter.
Interactive Brokers Hong Kong Limited Suite 1512, Two Pacific Place
Admiralty, Hong Kong
Securities and Futures (Client Money) Rules (Cap 571I, Laws of Hong Kong) Standing Authority
This letter of authority applies to money ("Monies") held or received by Interactive Brokers Hong Kong Limited ("IB") in Hong Kong (including any interest derived from the holding of such monies) in one or more segregated account(s) maintained by you on my/our behalf.
Unless otherwise defined, all terms used in this letter of authority shall have the same meaning as in the Securities and Futures Ordinance (Cap 571, Laws of Hong Kong) and the Securities and Futures (Client Money) Rules, as the same are amended from time to time.
In order to fully utilise the services provided by IB, including access to trading in different investment products in different jurisdictions, and in multiple currencies, where IB may lend money in one currency, which is secured by collateral held by IB in another currency ("Financing Services") and, to the extent that my/our account(s) may from time to time hold cash credit balances deposited in Hong Kong (in Hong Kong dollars and/or Chinese Yuan Renminbi) and simultaneous cash debit balances in any other currency or currencies, this letter authorises you to (at your discretion):
You may carry out any or all of the above acts without giving me/us prior notice. This authority is given to IB:
a. in consideration of its agreeing to continue to maintain securities cash and/or margin account(s) for me/ us; and/or
b. in consideration of its agreeing to continue to maintain futures account(s) for me/us; and
c. without prejudice to any other authority or rights which you, IB Group and/or any of its subsidiaries may have in relation to dealing in the Monies.
This authority is valid for a period of 12 months from the date of this letter.
This authority may be revoked by my/our giving you written notice (addressed to the Customer Service Department) sent to your address specified above. Such notice shall take effect upon the expiry of two weeks from the date of your actual receipt of such notice. I/we acknowledge that IB reserves the right to change the terms of the Financing Services at any time.
I/We understand that this authority shall be deemed to be renewed on a continuing basis without my/our prior written consent if you issue me/us a written reminder of such proposed renewal at least 14 days prior to the expiry date of the then prevailing authority, and I/we do not object to such deemed renewal before such expiry date. Within one week after such expiry date, you will give me/us a written confirmation of any such renewal of this authority.
This letter has been provided to me/us in English and I/we understand and agree with the contents of this letter.
A. RISK OF SECURITIES TRADING
B. RISK OF TRADING FUTURES AND OPTIONS
C. RISK OF TRADING IN LEVERAGED FOREIGN EXCHANGE CONTRACTS
D. RISK OF TRADING IN GROWTH ENTERPRISE MARKET STOCKS
E. RISK OF CLIENT ASSETS RECEIVED OR HELD OUTSIDE HONG KONG
F. RISK OF PROVIDING AN AUTHORITY TO REPLEDGE YOUR SECURITIES COLLATERAL ETC.
G. RISK OF MARGIN TRADING
H. RISK OF TRADING NASDAQ-AMEX SECURITIES AT THE STOCK EXCHANGE OF HONG KONG LIMITED
I. ADDITIONAL RISK DISCLOSURE FOR FUTURES AND OPTIONS TRADING
1. Effect of 'Leverage' or 'Gearing'
Transactions in futures carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract so that transactions are 'leveraged' or 'geared'. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit.
2. Risk-reducing orders or strategies
The placing of certain orders (e.g. "stop-loss" orders, or "stop-limit" orders), which are intended to limit losses to certain amounts, may not be effective because market conditions may make it impossible to execute such orders. Strategies using combinations of positions, such as 'spread' and 'straddle' positions may be as risky as taking simple 'long' or 'short' positions.
3. Variable degrees of risk
Transactions in options carry a high degree of risk. Purchasers and sellers of options should familiarize themselves with the type of option (i.e. put or call) which they contemplate trading and the associated risks. You should calculate the extent to which the value of the options must increase for your position to become profitable, taking into account the premium and all transaction costs.
The purchaser of options may offset or exercise the options or allow the options to expire. The exercise of an option results either in a cash settlement or in the purchaser acquiring or delivering the underlying interest. If the option is on a futures contract, the purchaser will acquire a futures position with associated liabilities for margin (see the section on Futures above). If the purchased options expire worthless, you will suffer a total loss of your investment which will consist of the option premium plus transaction costs. If you are contemplating purchasing deep-out-of-the-money options, you should be aware that the chance of such options becoming profitable ordinarily is remote.
Selling ('writing' or 'granting') options generally entails considerably greater risk than purchasing options. Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount. The seller will be liable for additional margin to maintain the position if the market moves unfavorably. The seller will also be exposed to the risk of the purchaser exercising the option and the seller will be obligated to either settle the options in cash or to acquire or deliver the underlying interest. If the option is on a futures contract, the seller will acquire a position in a futures contract with associated liabilities for margin (see the section on Futures above). If the option is 'covered' by the seller holding a corresponding position in the underlying interest or a futures contract or another option, the risk may be reduced. If the option is not covered, the risk of loss can be unlimited.
Certain exchanges in some jurisdictions permit deferred payment of the option premium, exposing the purchaser to liability for margin payments not exceeding the amount of the premium. The purchaser is still subject to the risk of losing the premium and transaction costs. When the option is exercised or expires, the purchaser is responsible for any unpaid premium outstanding at that time.
Additional Risks Common to Futures and Options
4. Terms and conditions of contracts
You should ask the firm with which you deal about the terms and conditions of the specific futures or options which you are trading and associated obligations (e.g. the circumstances under which you may become obliged to make or take delivery of the underlying interest of a futures contract and, in respect of options, expiration dates and restrictions on the time for exercise). Under certain circumstances the specifications of outstanding contracts (including the exercise price of an option) may be modified by the exchange or clearing house to reflect changes in the underlying interest.
5. Suspension or restriction of trading and pricing relationships
Market conditions (e.g. illiquidity) and/or the operation of the rules of certain markets (e.g. the suspension of trading in any contract or contract month because of price limits or 'circuit breakers') may increase the risk of loss by making it difficult or impossible to effect transactions or liquidate/offset positions. If you have sold options, this may increase the risk of loss.
Further, normal pricing relationships between the underlying interest and the future, and the underlying interest and the option may not exist. This can occur when, for example, the futures contract underlying the option is subject to price limits while the option is not. The absence of an underlying reference price may make it difficult to judge "fair" value.
6. Deposited cash and property
You should familiarize yourself with the protections given to money or other property you deposit for domestic and foreign transactions, particularly in the event of a firm insolvency or bankruptcy. The extent to which you may recover your money or property may be governed by specific legislation or local rules. In some jurisdictions, property which had been specifically identifiable as your own will be pro-rated in the same manner as cash for purposes of distribution in the event of a shortfall.
7. Commission and other charges
Before you begin to trade, you should obtain a clear explanation of all commission, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss.
8. Transactions in other jurisdictions
Transactions on markets in other jurisdictions, including markets formally linked to a domestic market, may expose you to additional risk. Such markets may be subject to regulation which may offer different or diminished investor protection. Before you trade, you should enquire about any rules relevant to your particular transactions. Your local regulatory authority will be unable to compel the enforcement of the rules of regulatory authorities or markets in other jurisdictions where your transactions have been effected. You should ask the firm with which you deal for details about the types of redress available in both your home jurisdiction and other relevant jurisdictions before you start to trade.
9. Currency risks
The profit or loss in transactions in foreign currency-denominated contracts (whether they are traded in your own or another jurisdiction) will be affected by fluctuations in currency rates where there is a need to convert from the currency denomination of the contract to another currency.
10. Trading facilities
Electronic trading facilities are supported by computer-based component systems for the order-routing, execution, matching, registration or clearing of trades. As with all facilities and systems, they are vulnerable to temporary disruption or failure. Your ability to recover certain losses may be subject to limits on liability imposed by the system provider, the market, the clearing house and/or participant firms. Such limits may vary: you should ask the firm with which you deal for details in this respect.
11. Electronic trading
Trading on an electronic trading system may differ from trading on another electronic trading system. If you undertake transactions on an electronic trading system, you will be exposed to risks associated with the system including the failure of hardware and software. The result of any system failure may be that your order is either not executed according to your instructions or is not executed at all.
12. Off-exchange transactions
In some jurisdictions, and only then in restricted circumstances, firms are permitted to effect off-exchange transactions. The firm with which you deal may be acting as your counterparty to the transaction. It may be difficult or impossible to liquidate an existing position, to assess the value, to determine a fair price or to assess the exposure to risk. For these reasons, these transactions may involve increased risks. Off-exchange transactions may be less regulated or subject to a separate regulatory regime. Before you undertake such transactions, you should familiarize yourself with applicable rules and attendant risks.
I. DISCLOSURE REGARDING HONG KONG OPTIONS
If you wish to file a complaint with Interactive Brokers LLC ("IB"), we encourage you to send your complaint via Account Management for the most expedient and efficient handling. This can be done by clicking on "Message Center." Under “New Ticket” select the most relevant Category and Sub-Category relating to the issue. For more information on filing a complaint in this manner, please visit IB’s website at http://ibkb.interactivebrokers.com/node/1302.
Alternatively, customers may send their complaints by contacting customer service at the telephone numbers listed on the IB website at www.interactivebrokers.com/help; or by hard copy addressed to:
Legal & Compliance Department
Interactive Brokers LLC
1 Pickwick Plaza
Greenwich, CT 06830
Alternatively, customers who wish to file a complaint with, or initiate an arbitration or reparations proceeding against, IB, should consult the website of, or contact, a Self-Regulatory Organization ("SRO"), e.g., the Securities and Exchange Commission (www.sec.gov), the Financial Industry Regulatory Authority (“FINRA”) (www.finra.org), the National Futures Association (www.nfa.futures.org), the Commodity Futures Trading Commission (www.cftc.gov).
The Securities Investor Protection Corporation ("SIPC") is a non-profit, membership corporation funded by broker-dealers that are members of SIPC. You may obtain information about SIPC coverage for your account including the SIPC brochure on the IB website by clicking here.
For information about your IB account, contact IB by clicking here.
You can contact SIPC directly at:
Securities Investor Protection Corporation
1667 K Street, N.W. - Suite 1000
Washington, D.C. 20006-1620
Telephone: (202) 371-8300
Facsimile: (202) 223-1679
Interactive Brokers is required to provide to you the following disclosure regarding option orders of over 500 contracts that may be executed using the International Securities Exchange (ISE) Block Order Solicitation Mechanism:
When handling an order of 500 contracts or more on your behalf, Interactive Brokers may solicit other parties to execute against your order and may thereafter execute your order using the ISE’s Solicited Order Mechanism. This functionality provides a single-price execution only, so that your entire order may receive a better price after being exposed to the Exchange’s participants, but will not receive partial price improvement. For further details on the operation of this Mechanism, please refer to ISE Rule 716, which is available at www.iseoptions.com under “Regulation – Rules.”
Due to the increasing risk of identity theft, Interactive Brokers (IB) is providing you with this notice regarding phishing scams. Phishing is a fraudulent activity in which one attempts to obtain sensitive information by masquerading as a trustworthy institution. These attempts are typically carried out by an email containing a link to what appears to be an authentic website. These counterfeit sites prompt you to enter your personal information, which the thieves may then use to access your accounts. Note that IB will NEVER send an email requesting sensitive information such as your password. If you receive a suspicious email request which identifies IB, DO NOT RESPOND and notify our Security Team by calling toll-free in the US at (877) 442-2757 or direct at (312) 542-6901. IB reminds you that Secure Login devices and customer user names and passwords should always be kept confidential.
IB goes to great lengths to keep customer accounts secure. Please visit the IB website for Customer Best Practices that can provide another layer of safety from online security threats: interactivebrokers.com/bestpractices.
IB further attests that should a breach occur, management will promptly take action to secure information, mitigate the breach, and notify, on a timely basis, any customers whose personally identifiable information could have been compromised.
Pursuant to U.S. regulations issued under Section 311 of the USA PATRIOT Act, Interactive Brokers prohibits customers from establishing, maintaining, administering or managing an account for, or on behalf of the following financial institutions:
The regulations also require us to notify you that your account with Interactive Brokers may not be used to provide services to any of the financial institutions or jurisdictions listed above with access to Interactive Brokers. If we become aware that any of the entities or jurisdictions listed above are directly or indirectly using the account you hold at Interactive Brokers, we will be required to take appropriate steps to prevent such access, including, where necessary, terminating your account. We may from time to time apprise you of additional entities that are added to this list as new restrictions are issued.
The Options Clearing Corporation ("OCC") publishes an Options Disclosure Document ("ODD"), and periodically updates the document with various supplements. The most recent supplement to this document was published in November 2012.
The supplements, which should be read in conjunction with the current ODD, and the ODD, are available on the OCC website and can be viewed by clicking on the following link: http://www.theocc.com/about/publications/character-risks.jsp.
This Financial Services Guide ("FSG") is dated 11 January 2016 and is issued by Interactive Brokers LLC (ARBN 091 191 141; AFSL 245574) ("IB", "we", "our", "us") IB has prepared this document pursuant to the requirements of the Corporations Act 2001 (Cth).
Section 1: Purpose & Content of the FSG
This FSG contains information that has been prepared without taking into account your objectives, financial situation or needs. Accordingly you should consider the information provided having regard to your own particular circumstances.
This FSG is an important document. It provides you with information to assist you in deciding whether to use any of the financial services offered by IB. You should read it carefully and make sure you understand it.
This FSG contains information about:
Other documents you may receive from us.
In addition to this FSG, we may be required to provide you with other documents.
We must provide you with a Product Disclosure Statement ("PDS") about a financial product when we recommend that you acquire, or offer to issue or arrange the issue of, a financial product.
A PDS contains important information about the features, benefits, risks, costs, and taxation implications of the relevant financial product that should assist you in deciding whether to acquire that financial product. We are not required to give you a PDS if you are dealing in certain financial products such as ASX-quoted equity securities and warrants.
For copies of the most current disclosure documents (including this FSG and any PDS') issued by IB, copies of legal terms and other important documents and information, please refer to the IB website at www.interactivebrokers.com.au and "Forms and Disclosures".
IB does not solicit orders from customers and does not offer any personal advice or recommendations to customers. Accordingly we will not provide you with a Statement of Advice ("SOA").
Section 2: Overview of IB and its Services
1. Who are we?
IB is an affiliate of Interactive Brokers Group ("IBG"), which comprises of a number of automated global electronic market makers and brokers that specialise in routing orders and executing and processing trades in securities, futures and foreign exchange instruments. IBG affiliates conduct business on more than 60 electronic exchanges and trading venues around the world. IB, using its proprietary software, provides non-advisory brokerage services to professional traders and investors with direct access to stocks, options, futures, forex and bonds from a single IB Universal AccountSM.
IB is a market participant of the ASX 24 market and the Chi-X Australia market. IB is not an ASX Market Participant, however it engages its proprietary trading affiliate, Timber Hill Australia Pty Limited (ABN 25 079 993 534) ("THA"), which is an ASX Market Participant, as its executing broker in respect of transactions to be executed on ASX.
IB is a wholesale client of THA and all IB client orders for ASX financial products routed through THA’s connection to the ASX Integrated Trading System use an electronic communications process dedicated to the routing of only IB customer orders. THA receives a set fee per trade from IB for this service.
A full list of the products IB offers and the worldwide exchanges on which they are offered is available on the IB website at www.interactivebrokers.com.au.
2. Financial services and financial products we offer
2.1 IB’s Australian Financial Services Licence
IB holds an Australian Financial Services Licence, under which we are authorised to: deal in:
IB is authorised to provide the above financial services to retail and wholesale clients.
2.2 IB’s custodial services
IB holds the Financial Products for which it is custodian for its customers in accordance with Customer Agreement as amended by the Supplemental Custody Agreement. IB holds such Financial Products for the benefit of its customers.
In markets where IB does not have direct access to the settlement system for the relevant Financial Products, IB appoints sub-custodians (who may be affiliates of IB) to hold Financial Products on its behalf. Further details about the sub-custodian’s IB uses are available from IB’s website at www.interactivebrokers.com. For example, in relation to ASX quoted securities, IB has appointed a third party clearing and settlement participant's nominee to hold securities in the ASX Settlement system for the benefit of IB, which in turn holds them as custodian for the benefit of its customers who are entitled to those securities. Similar arrangements apply in other jurisdictions outside Australia where IB is itself not the clearing participant.
In relation to customer's positions in exchange traded derivatives (such as futures and options), positions are held by IB for the benefit of its customers through clearing participants (who may be affiliates of IB) of the relevant exchanges, where IB is not itself a clearing participant.
3. How you can send IB instructions and contact information
IB's customers may submit orders to buy and sell Financial Products to IB through their Trader Workstation ("TWS"), Computer to Computer Interface or an Application Programming Interface, by logging in through a secure username and password.
IB’s customers may submit other instructions in relation Financial Products held by IB for its customers through IB’s account management portal. For example, IB’s account management portal provides eligible customers with tools to submit instructions as to how IB should exercise rights related securities, such as corporate actions. Please refer to IB’s website which contains important details about how to give instructions to IB in relation to the Financial Products held for you, including important information about timing of such instructions and entitlement to participate in certain corporate actions at www.interactivebrokers.com.au.
As set forth in the IB Customer Agreement, IB does not know whether an unauthorised person is entering orders with a customer’s user name/password. Customers are fully responsible for the confidentiality and use of their user name/password and remain responsible for all transactions entered using their user name/password.
Customers may also contact IB Customer Service using the details below:
IB Head Office – U.S.
One Pickwick Plaza
Greenwich, CT 06830, U.S.
Telephone Numbers: 1-877-442-2757 (from inside the U.S.); 312-542-6901 (from outside the U.S.)
IB Australian Office
Level 40, 225 George Street,
Sydney, NSW 2000
Telephone number: +61 (2) 8093 7300
Additional contact information, including issue-specific details, is available at www.interactivebrokers.com.au.
Section 3: Fees and Charges
1. Commission and Fees
IB charges commission and fees when you buy or sell or enter into or close out most financial products.
The amount of commission or fees payable to IB depends on the pricing structure selected and the product traded. For example, commission may be calculated as a percentage of the trade value with a set minimum charge per order, or as a dollar amount per contract. Current commission and fee information for each pricing structure and type of products is available on the IB website at www.interactivebrokers.com.au.
You may also request particulars of remuneration (including commission) or other benefits within a reasonable time after receiving this FSG and before any financial service is provided.
No IB employee earns a commission for the trades that are self-directed by IB customers. All commissions are earned by the firm.
2. Other Fees and Charges
2.1 Interest Payable and Interest Charged
In certain circumstances, interest may be paid to you or charged to you.
Interest may be payable on credit balances. Factors which affect the amount of interest payable include the currency in which the account is denominated and the amounts held in excess of your margin requirements. No interest is payable on credit balances less than $10,000.00 USD or equivalent.
IB uses internationally recognised benchmarks on overnight deposits as a basis for determining interest rates. We then apply a spread around the benchmark interest rate in tiers, such that larger cash balances receive increasingly better rates, to determine an effective rate.
IB accrues interest on a daily basis and posts actual interest at the end of each month on the monthly statement. For detailed examples on how we calculate interest, and for further information on how to read interest on your statement, please go to the IB website at www.interactivebrokers.com.au.
Interest is charged when your account balance is in debit. The spreads and effective rates on credit balances, debit balances and short sale proceed balances are shown in the tables on the IB website at www.interactivebrokers.com.au. We also provide detailed examples on how we calculate interest and information on how to read interest on your statement on that website.
2.2 Market Data, Fundamentals and News
If you require live data then depending on the product you are trading and where that product is based may then you may be required to enter into a subscription agreement with the associated exchange. You are not required to enter into a data subscription to open an account with IB.
Customers can subscribe to paid, real-time market data on exchanges around the world through Account Management. The subscription fee for market data on each exchange offered through IB is listed on the IB website at www.interactivebrokers.com.au.
In addition, IB provides free delayed data as available, for any product listed on an exchange to which you do not subscribe. Delayed market data is managed in Trader Workstation ("TWS"), and ticker lines that use delayed data are highlighted in yellow for emphasis. For details on managing delayed market data, see the TWS Users' Guide.
We also provide real-time fundamentals and news via subscription-activated Reuters Worldwide Fundamentals and Reuters News Feed, along with various free RSS news feeds, all of which are seamlessly integrated into the TWS trading application. The subscription fee for each of these services are listed on the IB website at www.interactivebrokers.com.au.
There is no requirement to subscribe to market data in order to trade and customers are free to receive market data from another IB account or data vendor, or to use only delayed market data.
Many exchanges classify customers as non-professional or professional. Exchange rules require that trusts and organisations (e.g. corporations, partnerships, LLCs and unincorporated businesses) must be classified as professional. NYSE and Amex Professional Market Data require prior approval from the exchange information.
2.3 Product-specific fees and charges
There may be fees and charges payable by you in respect of specific financial product which we issued to you. Our PDS in respect of that financial product will contain information on any fees and charges relating to that financial product.
2.4 Required Minimums
To use our service, there are certain "required minimums". There is arequired minimum deposit on opening an account, a required minimum commission per month by way of an activity fee , and required minimum connection fees for certain services as applicable. Details of these "required minimums" are as set out on the IB website at www.interactivebrokers.com.au.
2.5 Advisor Client Markups
Advisors may charge their clients for services rendered either through automatic billing, electronic invoice or direct billing. The available billing methods including caps and limitations are described at the IB website at www.interactivebrokers.com.au.
Section 4: Associations/Relationships & Potential Conflicts of Interest
Neither IB nor any related bodies corporate have any relationships or associations with any product issuer that could reasonably be expected to be capable of influencing us in the provision of financial services. Similarly, IB does not act under any binder in providing any authorised services. Unless otherwise disclosed, IB generally acts on its own behalf when providing financial services to you. The relationship between IB and THA is as disclosed in Section 2 of this FSG.
Section 5: Dispute Resolution
If you have a complaint about the services provided to you by IB, you should take the following steps to ensure that your complaint is handled efficiently.
We encourage you to send your complaint via Account Management for the most expedient and efficient handling. This can be done by clicking on "Inquiry Ticket." Under "New Ticket" select the following:
Category: Other Regulatory
Sub-category: Submit a Complaint
Alternatively, customers may send their complaints to:
IB will attempt to resolve your complaint and will notify you of any proposed resolution. If your complaint is not resolved to your satisfaction, you may lodge a written complaint to the Financial Ombudsman Service ("FOS") of which IB is a member. This service is provided to you free of charge and the FOS can be contacted as below:
Financial Ombudsman Services:
GPO Box 3, Melbourne, Victoria 3001
Telephone 1300 780 808
Facsimile 9613 6399
You may also refer the matter to the Australian Securities and Investments Commission ("ASIC"). ASIC may be contacted on their Infoline on 1300 300 630.
Alternatively, customers who wish to file a complaint with, or initiate an arbitration or reparations proceeding against, IB, may consult the website of, or contact, a Self-Regulatory Organisation ("SRO"), e.g., the Securities and Exchange Commission (www.sec.gov), the Financial Industry Regulatory Authority (www.finra.org), the National Futures Association (www.nfa.futures.org), the Commodity Futures Trading Commission (www.cftc.gov).
Section 6: Compensation Arrangements
IB is covered by a professional indemnity insurance policy ("Policy") which satisfies the requirements of section 912B of the Corporations Act. Subject to its terms and conditions, this Policy may cover losses or damages suffered by retail clients as a result of breaches by IB of the relevant obligations of IB under its Australian Financial Services Licence.
Section 7: International entities which hold Financial Products
IB provides a list of the entities, which may be foreign brokers, clearing participant and or sub-custodians, who hold Financial Products on behalf of IB LLC or sub-custodians of IB LLC on its website www.interactivebrokers.com.au under "Forms and Disclosures" >> "Disclosures" >> "Notice to Australian clients from Interactive Brokers LLC of persons holding financial products".
Standard & Poor's issues investment grade ratings to both IBG LLC and IB LLC. For more information on Standard & Poor's, visit: http://www.standardandpoors.com.
The Securities and Exchange Commission requires that we make available to customers the annual and semi-annual statements of financial condition for Interactive Brokers LLC, a subsidiary of IBG LLC. You may access such information for the most recent period by clicking here.