The methodology or model used to calculate the margin requirement for a given position is determined by:
There are generally two types of margin methodologies: rule-based and risk-based.
At IB, we have account types based on the rule-based Reg T and the risk-based Portfolio Margin. I'll talk about these in a few minutes.
Regardless of whether the methodology is rule-based or risk-based, IB may set special house requirements on certain securities. For example, IB may reduce the collateral value (marginability) of certain securities for a variety of reasons, including:
In the US, the Federal Reserve Board is responsible for maintaining the stability of the financial system and containing systemic risk that may arise in financial markets. It does this, in part, by governing the amount of credit that broker-dealers may extend to customers who borrow money to buy securities on margin.
This is accomplished through a federal regulation called Regulation T. Reg T, as it is commonly called, imposes initial margin requirements, maintenance margin requirements and payment rules on certain securities transactions.
Initial Margin is the percentage of the purchase price of securities that you must pay for with your own cash and/or marginable securities.
Reg T currently lets you borrow up to 50 percent of the price of the securities to be purchased. So on stock purchases, Reg. T requires an initial margin deposit of 50% of the purchase value, which in turn allows the broker to extend credit or finance the remaining 50%.
For example, if you are purchasing $1,000 worth of securities, under Reg T, you are required to deposit $500 and allowed to borrow $500 to hold those securities.
Maintenance Margin is the amount of equity that you must maintain in your account to continue holding a position.
During active market hours, IB clients can take advantage of reduced intraday margin for securities – generally 25% of the long stock value. In order to hold a position overnight, margin requirement reverts to the Reg T requirement of 50% of stock value.
Note that margin may not be extended for certain securities such as Pink Sheet, OTCBB and low capitalization.
There are two risk-based margin methods that I want to discuss today: Portfolio Margin and SPAN.
Portfolio Margin is a risk-based methodology that uses a model called TIMS, which stands for Theoretical Intermarket Margin System. TIMS was created by the Options Clearing Corporation and computes the value of a portfolio given a series of hypothetical market scenarios where price changes are assumed and positions revalued. IB also considers a number of house scenarios to capture additional risks such as extreme market moves, concentrated positions and shifts in option implied volatilities. Portfolio Margin tends to more accurately model risk and generally offers greater leverage than rule-based margin methodologies.
Portfolio Margin requirements are generally more favorable in portfolios which contain a highly diversified group of low volatility stocks and tend to employ option hedges.
Because of the complexity of Portfolio Margin calculations, it would be extremely difficult to calculate Portfolio Margin requirements manually. If you're interested in Portfolio Margin, we recommend that you use our TWS Portfolio Margin Demo to understand the impact of Portfolio Margin requirements under different scenarios.
Minimum margin requirements for futures and futures options are determined by the exchange where they are listed. The exchanges use a risk-based margin methodology called Standard Portfolio Analysis of Risk or SPAN . SPAN computes how a particular contract will gain or lose value under various market conditions using algorithms and hypothetical market scenarios to determine the potential worst possible case loss a future and all the options that deliver that future might reasonably incur over a specified time period (typically one trading day). You can view SPAN requirements on our website or in the contract description window available in TWS.
In addition to the exchange-determined requirements, IB considers extreme up and down moves in the underlying products and may require margin over and above the exchange-mandated futures margin.
An overview of the SPAN margining system is provided in KB563.
Interactive Brokers offers several account types that you select in your account application, including a cash account and two types of margin accounts – Reg T Margin and Portfolio Margin.
Reg T Margin accounts are rule-based. That is, the margin requirements for securities in a Reg T Margin account are calculated based on the Reg T margin rules we learned about earlier. The Reg. T rules apply to margin for securities products including: U.S. stocks, index options, equity options, single stock futures, mutual funds and bonds.
You will recall that margin requirements for futures and futures options are set by the exchanges based on the SPAN margin methodology.
Portfolio Margin accounts are risk-based. As the name implies, margin requirements in a Portfolio Margin account are calculated based on the Portfolio Margin (and TIMS) risk-based methodology. Positions eligible for Portfolio margin treatment include U.S. stocks, ETFs, options, single stock futures and non-U.S. stocks and options.
Given its ability for enhanced leverage and that the requirements fluctuate and may react quickly to changing market conditions, Portfolio Margin accounts are intended for sophisticated traders, and require minimum equity of $110,000 to initiate and $100,000 to maintain.
One important thing to remember is this - if your Portfolio Margin account equity drops below 100,000 USD, you will be restricted from doing any margin-increasing trades. Therefore if you do not intend to maintain at least USD 100,000 in your account, you should not apply for a Portfolio Margin account.
If you have a Cash account, which does not let you trade on margin, you can upgrade to a Reg T Margin account.
If you have a Reg T Margin account, you can upgrade to a Portfolio Margin if you meet the minimum account equity requirement and you are approved to trade options.
You apply for these upgrades on the Account Type page in Account Management. The menu path is Manage Account > Settings > Configure Account > Account Type.
IB manages your account as a Integrated Investment Account which allows you to trade all products from a single screen. Although your margin account should be viewed as a single account for trading and account monitoring purposes, it consists of two underlying account segments:
As part of the IB Integrated Investment Account service, IB is authorized to automatically transfer funds as necessary between your IB securities and commodities account segments to satisfy margin requirements in either account.
You can configure how you want IB to handle the transfer of excess funds using a feature called Excess Funds Sweep in our Account Management system. This feature lets you choose to sweep funds to the securities account, to the commodities account, or you can choose not to sweep excess funds at all. If you choose not to sweep excess funds, funds will not be swept except to meet margin requirements.
There is a lot of detailed information about margin on our website. The Margin pages are available by clicking Products > Margin on our website and they include:
In a Reg T Margin account, IB applies Margin Calculations at the following times:
Calculations work differently at different times. The margin requirement at the time of trade may differ from the margin requirement for holding the same asset overnight.
Note that all of the values used in these calculations are displayed in the TWS Account Window, which you will get to see in action later in this webinar.
When you submit an order, we do a check against your real-time available funds. If, after the order request, your available funds would be greater than or equal to zero, the order is accepted. If available funds would be negative, the order is rejected.
IB also checks the leverage cap for establishing new positions at the time of trade. The leverage cap helps to prevent situations in which there is little or no apparent market risk in holding very large positions but there may be excessive settlement risk.
IB also performs real-time margin calculations throughout the day, including maintenance margin calculations, leverage checks, decreased marginability calculations and real time SMA calculations.
IB performs maintenance margin calculations throughout the day for securities and commodities in a Reg. T Margin account. Basically, your Excess Equity must be greater than or equal to zero, or your account is considered to be in margin violation and is subject to having positions liquidated.
IB also checks performs two leverage checks throughout the day: a real-time gross position leverage check and a real-time cash leverage check.
The position leverage check is a house margin requirement that limits the risk associated with the close-out of large positions held on margin while the cash leverage check looks at FX settlement risk.
IB reduces the marginability of stocks for accounts holding concentrated positions relative to the shares outstanding (SHO) of a company. In Reg. T Margin accounts, this increases the margin requirement for stock positions exceeding 1% of the published shares outstanding from its default to 100% (in other words, decreases the amount of money that can be borrowed against a stock position toward zero). At 5% concentration, positions have a 100% margin requirement.
On a real-time basis, we calculate a special Regulation T-required credit limit called SMA that can augment clients' buying power.
SMA refers to the Special Memorandum Account, which represents neither equity nor cash, but rather a line of credit created when the market value of securities in a Reg. T margin account increase in value. Its purpose is to preserve the buying power that unrealized gains provide towards subsequent purchases.
You'll see SMA when we show you how to monitor your margin in TWS a bit later in this webinar.
Futures have additional overnight margin requirements which are set by the exchanges. I'll show you where to find these requirements in just a minute. Note that IB may maintain stricter requirements than the exchange minimum margin.
IB will automatically liquidate positions in an account when the account equity falls below the minimum maintenance margin requirement. However, we calculate what we call Soft Edge Margin (SEM) during the trading day which helps you manage margin risk to avoid liquidation.
To summarize Soft Edge Margin: If your account falls below the minimum maintenance margin, it will not be automatically liquidated until it falls below the Soft Edge Margin. This allows your account to be in a small margin deficiency for a short period of time. Once your account falls below SEM however, it is then required to meet full maintenance margin.
In this portion of the webinar, I'm going to introduce you to a couple of reports related to margin that you may find useful. They are:
These reports like all our reports are available from within Account Management.
Margin reports show your margin requirements for single and combination positions, and display both available and excess liquidity as well as other values important in IB margin calculations. Each day at 16:15 ET we record your margin and equity information across all asset classes and exchanges.
Note that because information on your statements is displayed "as of" the cut-off time for each individual exchange, the information in your margin report may be different from that displayed on your statements.
Access margin reports by clicking Reports > Risk > Margin Report in Account Management.
Here is an example of a margin report:
To learn more about what's in a margin report, take a look at the Report Reference section in our Reporting Guide, which is available along with all of our other users' guides at Traders' University on our website.
Another report that may be of interest to you is the Stress Test Report (sometimes known as the Stress Test Summary Report). This report lets you see the change in the profit and loss of your positions if the underlying price of each of your positions declines by 3%, 5%, 10%, 20% and 30% and independently increases by 3%, 5%, 10%, 20% and 30%. The results are based on theoretical pricing models and do not take into account coincidental changes in volatility or other variables that affect derivative prices.
The report shows:
So far, I've introduced you to the basic concepts of margin and margin accounts here at IB, and how we don't have margin calls at IB but we do have real-time liquidation of positions if you don't meet your margin requirements.
Don't panic, however. Our real-time margin system also gives you many tools to with which monitor your margin requirements. Always use the margin monitoring tools to gauge your margin situation. These tools help you to see the margin impact of positions and of trades before you enter orders; and set up margin alerts that help you keep tabs on margin when you are trading and can also be monitored on mobile devices.
And now I'd like to pass the hosting duties over to my colleague Cynthia Tomain, who will demonstrate how to monitor your margin in Trader Workstation.
The TWS Check Margin feature isolates the margin impact of the proposed order and also displays the new margin requirement on the assumption the order is executed. Key margin balances including the Initial and Maintenance Requirements are reported as is the Equity With Loan Value.
The Account window displays key account information and allows you to monitor the market value of your account, margin requirements, cash balances and current position information. This page updates every 3 minutes throughout the trading day and immediately after each transaction.
Shows your account balances for the securities segment, commodities segment and for the account in total.
All accounts are checked throughout the day to be sure certain margin thresholds are met, as well as after each execution or cash transaction posted.
It's important to note that the calculation of a margin requirement does not imply that the account is borrowing funds, employing leverage or incurring interest charges. IB will only generate a margin loan in the event that the account does not have sufficient settled funds to support the purchase of additional securities or holding of existing securities. In situations where there is no margin loan, the reporting of a margin requirement on the trading platform is intended for monitoring the account's financial capacity to sustain a margin loan.
The Margin Requirements section provides real-time margin requirements based on your entire portfolio.
Portfolio Margin calculations are complex, specific to your account holdings – so if you are curious to see if Portfolio Margin can benefit you – use the TRY PM button in the TWS Account window for your current portfolio or try our TWS Portfolio Margin Demo to understand the impact of Portfolio Margin under different scenarios.
Read more about Portfolio Margining.
A day trade is when a security position is open and closed in the same day. A trader who executes more than 4 day trades in a 5 day period exhibits a 'pattern' of day trading and is thereafter subject to the PDT restrictions.
If an account has less than $25,000 in equity it is limited to 3 day trades within a 5 day period. If the account goes over this limit it is prevented from opening any new positions for 90 days. The IB system is programmed to protect the accounts that might "potentially" be flagged as day trading accounts by not allowing the 4th opening transaction within 5 days if the account has less than $25,000.
Margin accounts with balances greater than $25,000 have no restriction on the number of day trades placed. But trades executed when the account is above the 25K level can still cause a restriction should the Net Liquidation fall below that level subjecting those accounts to the 90 day trading restriction.
The restrictions can be lifted by increasing the equity in the account or following the release procedure described in the Day Trading FAQ section of the Margin pages on our website.
Note that an option exercise or assignment will count towards day trading activity as if the underlying had been traded directly.
The Portfolio section displays all your positions (also available in TWS on the Portfolio tab). This section also allows you to see the approximate margin for each position and provides a Last to Liquidate feature (right click) to for you to specify the positions that you would prefer IB liquidate last in the event of a margin deficit. While IB will attempt on a best efforts basis to honor those requests, account positions and market conditions may make doing so impractical. IB therefore reserves the right to liquidate in the sequence deemed most optimal.
Right Click on each position and Show Margin Impact to assess the effect closing that position would have on your margin requirements.
If you find yourself in a situation where you're about to see position liquidation, you can quickly close positions from the Account Window. Right-click on a position in the Portfolio section, select Tradeand specify:
Margin requirements are computed in real-time and if there's a deficiency IB will automatically liquidate positions when your account falls below the minimum maintenance margin requirement. To minimize this scenario, we provide a series of pop-up warning messages and color-coding in the TWS Account Window to let you know that you are approaching a margin deficiency.
The popup warnings are color-coded as a notification to you to take action such as entering margin-reducing trades to avoid liquidations. The Account screen conveys the following information at a glance:
IB will generate a message when the margin cushion in an account reaches 5% and a margin deficiency is therefore approaching.
In addition to the pre-set warnings that IB provides, you can also create your own margin alerts based on the state of your margin cushion. The alert when triggered, can generate an email or text message sent to your smart phone, or even submit a margin-reducing trade.
While the purchase of an option generally requires no margin since the position is paid in full, once exercised the account holder is obligated to either pay for or finance the ensuing stock position. Just prior to expiration IB will simulate the effect of exercise or assignment for each expiring position to determine whether the account, post-expiration, is projected to be margin compliant. IB may liquidate positions in the account to resolve the projected margin deficiency for Accounts which do not have sufficient equity on hand prior to exercise.
Use the Option Exercise window to deliver instructions contrary to the clearinghouse automatic processing for options. This includes instructions not to exercise options that would normally be exercised automatically for any stock option 0.01 or more in-the-money. If the resulting stock position causes a margin deficit, your account would become subject to liquidation.
Open the Option Exercise window from the Account menu (Classic TWS toolbar Trade menu). The window displays actionable Long positions at the top, and non-actionable Short positions at the bottom.
Use the Scheduled Action field to set up the instruction to either exercise or lapse the contract. (Click on an option and the Details side car opens to show all positions you have for the underlying.)
Your instruction is displayed like an order row. Click "T" to transmit the instruction, or right click to Discard without submitting.
Note: Future Options (FOP) exercises must be submitted via web ticket in Account Management. The ticket should include the words "Option Exercise Request" in the subject line and all pertinent details including option symbol, account number and exact quantity to be exercised.
Reports in Account Management can easily be accessed from the TWS Account menu.
Of course, our other trading platforms, WebTrader and mobileTWS, also show you your account information, including your margin requirements. Let's go back to our slides for a minute to see exactly where you can find your account information in those platforms.
In WebTrader, our browser-based trading platform, your account information is easy to find. After you log into WebTrader, simply click the Account tab. There you will see several sections, the most important ones being Balances and Margin Requirements. All of the important values, including your initial and maintenance margin, excess liquidity and net liquidation value, that you want to monitor are in those two sections.
On mobileTWS for your phone, touch Account on the main menu. You'll see that the Account information on mobileTWS is divided into several sections, including Balances, Margin and Funds. All of the important values, including your initial and maintenance margin, excess liquidity and net liquidation value, that you want to monitor are in those sections. Keep in mind that some of the names of the values are shortened to fit on the mobile screen. For example, Current Excess Liquidity is shorted to Current Excess. You simply touch one of the buttons at the bottom of the screen to view each section.
On mobileTWS for an iPad or Android tablet, tap the Account quick access button. Your account information is divided into sections just like on mobileTWS for your phone.
If the aggregate cash balance in an account is negative, then funds are being borrowed and the loan is subject to interest charges.
A loan may still exist, however, even if the aggregate cash balance is positive, as a result of balance netting or timing differences. The most common examples of this include:
The calculation of a margin requirement does not imply that the account is borrowing funds. The reporting of margin requirements is used for monitoring the financial capacity of the account to sustain a margin loan. IB will only generate a margin loan in the event that the account does not have sufficient settled funds to support the purchase of additional securities or holding of existing securities.
Anything that places your account in a margin deficit:
In a hedged Portfolio margin account you need to be aware of the Expiration Related Liquidations.
Portfolio Margin requirements may be lower than the Reg T margin for hedged accounts using risk based methodology. But you must maintain at least a $100,000 balance equivalent in your account.
If your account is enabled for Portfolio Margining, and dips below $100,000 minimum balance requirement, your account will revert to Reg T requirements which generally affords less leverage than does Portfolio Margining, so a downgrade may lead to the automatic liquidation of positions to comply with Reg T fixed percentages.You will be limited to entering trades which serve solely to reduce the margin requirement or to close positions until:
Expiration exposure refers to the overall exposure to options positions that will be exercised or assigned (and are already in the money), as well as positions that may be exercise or assigned based on a percentage distance from the strike price. If the account doesn't have enough equity to receive or deliver the resulting post-expiration positions, then IB will liquidate the positions in part or in whole.
This basically means that IB will prohibit the exercise of equity options and/or liquidate short option positions if the effect of the exercise or assignment would be to place the account in a margin deficit.
While the purchase of an option generally requires no margin since the position is paid in full, once exercised the account holder is obligated to either pay for the ensuing long stock position in full or finance the long or short stock position. Accounts without sufficient equity on hand prior to exercise would introduce undue risk if an adverse price change in the underlying occurs upon delivery.
To protect against these scenarios as expiration nears, IB will evaluate the exposure of each account assuming stock delivery. If the exposure is deemed excessive, IB will:
Account holders may monitor this expiration related margin exposure in the TWS Account Window. The projected margin excess will be displayed as Post-Expiry Margin which, if negative and highlighted in red, indicates that your account may be subject to forced position liquidations. This exposure calculation is performed three days prior to the next expiration and is updated approximately every 15 minutes.
If an expired USD option position results in an automatic exercise (the Options Clearing Corporation will automatically exercise any stock option which expired 0.01 or more in-the-money), and the resulting stock position causes a margin deficit in your account, your account would become subject to liquidation.
Given that the OCC processes the exercise and assignment after the expiration Friday close, liquidations in USD equities usually occur shortly after the open of regular trading hours (09:30 EST) on Monday or the next trading day.
You should be aware that any positions could be liquidated as a result of your account being in margin violation—the liquidation is not confined to only the shares that resulted from the option position. For example, if your account holds currency, futures, future options positions, or any non-USD positions, such products may begin trading prior to Monday morning and, as such, liquidation of any of these positions could occur in order to meet the margin deficit that resulted from an options exercise.
Yes. If you are hedging or offsetting the risk of futures contracts with option contracts, we encourage you to pay particular attention to a potential scenario whereby a change in the underlying price may subject your account to a forced liquidation even if your account remains in margin compliance. This scenario is driven by a fundamental difference in which gains and losses are recognized in futures contracts vs. options contracts coupled with IB's requirement that the commodity segment of one's account maintain a positive cash balance at all times.
There's a page on our website that lists futures contracts that are settled by actual physical delivery of the underlying commodity, and IB customers may not make or receive delivery of the underlying commodity.
To avoid deliveries of expiring futures contracts as well as those resulting from futures options contracts, customers must roll forward or close out positions prior to the Start of the Close-Out Period. If a position exists at the Start of the Close-Out Period, the account becomes subject to an IB-generated liquidation trade. The liquidation trade will occur at some point between the Start of the Close-Out Period and the respective Cutoff.
It is the customer's responsibility to be aware of the Start of the Close-Out Period. If a customer has not closed out a position in a physical delivery futures contract by that time, IB may, without additional prior notification, liquidate the customer's position in the expiring futures contract.
Note that liquidations will not otherwise impact working orders; customers must ensure that open orders to close positions are adjusted for the actual real-time position.
An Account holding stock positions that are full-paid (i.e. no cash debit) remains susceptible to liquidation if the account falls into deficit and the loan value of the stock is insufficient to cover the debit.