US to US Bonds Margin Requirements

US Fixed Income Margin Overview

US Fixed Income Margin Requirements


As a resident of the US trading bonds in US you are subjected to Rules-based margin. The complete margin requirement details are listed in the section below.




The following rules apply for Margin and Portfolio Margin accounts. Bonds must be paid-in-full in a Cash account.

FINRA and the NYSE have imposed rules to limit small investor day trading. Customers that these organizations classify as Pattern Day Traders are subject to special Day Trading Restrictions for US securities.


Government Bonds Margin


US Treasury Securities Initial Margin Requirements Maintenance Margin Requirements
Less than six months to maturity 1% * Market Value Same as Initial Margin
Less than one year to maturity 2% * Market Value Same as Initial Margin
One year but less than three years to maturity 3% * Market Value Same as Initial Margin
Three years but less than five years to maturity 4% * Market Value Same as Initial Margin
Five years but less than ten years to maturity 5% * Market Value Same as Initial Margin
Ten years but less than twenty years to maturity 7% * Market Value Same as Initial Margin
Twenty years or more to maturity 9% * Market Value Same as Initial Margin
Zero coupon bonds with five years or more to maturity 3% * Principal Amount of the Obligation Same as Initial Margin


Municipal Bonds


Initial Margin Requirements Maintenance Margin Requirements
Investment Grade 1 1.25 * Maintenance Margin 2 25% * Bond Market Value
Speculative Grade 1 1.25 * Maintenance Margin 2 50% * Bond Market Value
Junk Grade 1 1.25 * Maintenance Margin 2 75% * Bond Market Value
Defaulted 1 100% * Bond Market Value 2 100% * Bond Market Value


Corporate Bonds


The margin for the following types of corporate bonds is determined using a proprietary Value At Risk (VAR) methodology 3:

  • Investment Grade
  • NYSE-listed Speculative Grade
  • NYSE-listed Junk Grade

The theoretical price of each bond is calculated over a range of interest rate offsets to the prevailing Treasury yield curve. The result of such a calculation is illustrated in the following figure. As the interest rate offset increases, the bond price decreases. The upward curvature of the line is indicative of the "convexity" of the bond.


Bonds

The VAR is the worst case loss in the bond price over a specified range of underlying interest rate changes. The scanning ranges are listed in the table below.


Bond Type Basis Points
Investment Grade (Moody's Aaa to Baa3) 200 basis points
NYSE-Listed Speculative Grade (Moody's Ba1 to B3) 300 basis points
NYSE-Listed Junk Grade (Moody's Caa1 to C) 400 basis points

Within the Value At Risk calculation, bonds that contain embedded options (calls or puts) are subjected to stress tests that separately increase and decrease the interest rate period volatilities used to calculate the theoretical price of the bond by 15% of their values. Under each volatility change scenario, another theoretical price curve is calculated over the same range of interest rate offsets to the prevailing Treasury yield curve. The VAR for bonds with embedded options is taken as the worst case loss on the appropriate interest rate scanning range across each of the unchanged, up and down volatility scenarios.

The regulatory minimum margin of 10% of market value applies to investment grade bonds. The regulatory minimum of the larger of 20% of market value and 7% of face value applies to non-investment grade, NYSE-listed bonds.

Non-NYSE-Listed Speculative and Junk Bonds are margined as follows:

Bond Type Initial Margin Maintenance Margin
Non-NYSE-Listed Speculative Grade 50% * Bond Market Value 50% * Bond Market Value
Non-NYSE-Listed Junk Grade 70% * Bond Market Value 70% * Bond Market Value


Bonds that have defaulted or that are not rated are not eligible for margin treatment.



Special Margin Bonds


We may reduce the collateral value of securities (reduces marginability) for a variety of reasons, including:

  • small market capitalization or small issue size
  • low liquidity in the collective primary/secondary exchanges
  • involvement in tenders and other corporate action

Changes in marginability are generally considered for a specific security. However, in cases of concerns about the viability or liquidity of a company, marginability reductions will apply to all securities issued by, or related to, the affected company, including bonds, derivatives, depository receipts, etc.

In addition, please see discussions on special risk management algorithms, for example, large position and position concentration algorithms which may affect the margin rate applied to a given security within an account and may vary between accounts.




Overview of Pattern Day Trading ("PDT") Rules

FINRA and the NYSE have instituted regulations intended to limit the amount of trading that can be done in accounts with small amounts of capital, specifically accounts with less than 25,000 USD Net Liquidation Value. Pattern Day Trading rules will not apply to Portfolio Margin accounts.



Pattern of Day Trader
  • Day Trade: any trade pair wherein a position in a security (Stocks, Stock and Index Options, Warrants, T-Bills, Bonds, or Single Stock Futures) is increased ("opened") and thereafter decreased ("closed") within the same trading session.
  • Pattern Day Trader: someone who effects 4 or more Day Trades within a 5 business day period. A trader who executes 4 or more day trades in this time is deemed to be exhibiting a ‘pattern’ of day trading and is thereafter subject to the PDT restrictions.
  • In order to day trade, the account must have at least 25,000 USD in Net Liquidation Value, where Net Liquidation Value includes cash, stocks, options, and futures P+L.
  • The NYSE regulations state that if an account with less than 25,000 USD is flagged as a day trading account, the account must be frozen to prevent additional trades for a period of 90 days. We have created algorithms to prevent small accounts from being flagged as day trading accounts, to avoid triggering the 90 day freeze. We implement this by prohibiting the 4th opening transaction within 5 days if the account has less than 25,000 USD in equity.

Adjustments to Previous Day's Equity and First Day Trading


The previous day's equity is recorded at the close of the previous day (4:15 PM ET). Previous day's equity must be at least 25,000 USD. However, net deposits and withdrawals that brought the previous day's equity up to or greater than the required 25,000 USD after 4:15 PM ET on the previous trading day are handled as adjustments to the previous day's equity, so that on the next trading day, the customer is able to trade.

For example, suppose a new customer's deposit of 50,000 USD is received after the close of the trading day. Even though his previous day's equity was 0 at the close of the previous day, we handle the previous day's late deposit as an adjustment, and this customer's previous day equity is adjusted to 50,000 USD and he is able to trade on the first trading day. Without this adjustment, the customer's trades would be rejected on the first trading day based on the previous day's equity recorded at the close.

Special Cases


  • Accounts that at one time had more than 25,000 USD, were identified as accounts with day trading activity, and thereafter the Net Liquidation Value in the account dropped below 25,000 USD, may find themselves subject to the 90 day trading restriction. The restrictions can be lifted by increasing the equity in the account or following the release procedure located in the Day Trading FAQ section.
  • The proceeds of an option exercise or assignment will count towards day trading activity as if the underlying had been traded directly. Deliveries from single stock futures or lapse of options are not considered part of a day trading activity.

Additional details relating to PDT regulations and our implementation of these rules can be found in the FAQ section.



Day Trading FAQs


FINRA and the NYSE define a Pattern Day Trader (PDT) as one who effects four or more day trades (same day opening and closing of a given equity security ("stock") or equity option) within a five business day period.

Note that Futures contracts and Futures Options are not included in the SEC Day Trade rule.

A potential pattern day trader error message means that an account has less than the SEC required $25,000 minimum Net Liquidation Value AND the number of available day trades (3) has already been used within the last five days.

The system is programmed to prohibit any further trades to be initiated in the account, regardless of the intent to day trade that position or not. The system is programmed to protect the accounts with less than $25,000 so the account would not "potentially" be flagged as a day trading account.

If an account receives the error message "potential pattern day trader", there is no PDT flag to remove. The account holder will need to wait for the five-day period to end before any new positions can be initiated in the account.

The customer has the following options:

  1. Deposit funds to bring the account's equity up to the SEC required minimum of $25,000
  2. Wait the required 90 day period before any new positions can be initiated
  3. Request a PDT account reset

If the intraday situation occurs, the customer will immediately be prohibited from initiating any new positions. Customers should be able to close any existing positions in his account, but will not be allowed to initiate any new positions.

The customer will have the same options listed above, however, if at any time the Net Liquidation Value figure goes back above the threshold amount ($25,000), then the account will once again have unlimited day trades available.

FINRA has provided brokerage firms the ability to remove the PDT flag from a customer's account once every 180 days. If an account was erroneously flagged, and the customer's intent is not to day trade in his/her account, we have the ability to remove this flag. Once the PDT flag is removed, the customer will then be allowed three day trades every five business days. If an account gets re-flagged as a PDT account within 180 days after the reset, the customer then has the following options:

  1. Deposit funds to bring the account's equity up to the SEC required minimum of $25,000
  2. Wait the required 90 day period before any new positions can be initiated

FINRA and the NYSE define a Pattern Day Trader (PDT) as one who effects 4 or more day trades (same day purchase and sale of a given equity security ("stock") or equity option) within a five-day period, and NYSE and FINRA rules place certain restrictions on those who are deemed to be pattern day traders. If a customer account effects three (3) day trades involving stocks or equity options within any five (5) day period, we will require that such account satisfy the minimum Net Liquidation Value requirement of $25,000 before we will accept the next order to purchase or sell a stock or equity option. Once the account has effected a fourth day trade (in such 5 day period), we will deem the account to be a PDT account.

Pattern Day Trading regulations allow a broker to remove the PDT designation if the client acknowledges that she/he does not intend to engage in day trading strategies, and requests that the PDT designation be removed. If you wish to have the PDT designation for your account removed, provide us with the following information in a letter using the Customer Service Message Center in Account Management:

  1. Provide the following acknowledgements:
    • I do not intend to engage in a day trading strategy in my account.
    • I hereby request that you the broker no longer designate my account as a "Pattern Day Trading" account under NYSE and FINRA rules.
    • I understand that if, following this acknowledgement I engage in Pattern Day Trading, my account will be designated as a Pattern Day Trading" account, and you the broker will apply all applicable PDT rules to my account.
  2. Log into Account Management, then click Message Center in the Support menu. Create a ticket in the Message Center, then paste the aforementioned acknowledgements, your account number, your name, and the statement "I agree" into the ticket form. Submit the ticket to Customer Service.

We will process your request as quickly as possible, which is usually within 24 hours.

For example, if the window reads (0,0,1,2,3), here is how to interpret this information:

If today was Wednesday, the first number within the parenthesis, 0, means that 0-day trades are available on Wednesday. The 2nd number in the parenthesis, 0, means that no day trades are available on Thursday. The 3rd number within the parenthesis, 1, means that on Friday 1-day trade is available. The 4th number within the parenthesis, 2, means that on Monday, if 1-day trade was not used on Friday, and then on Monday, the account would have 2-day trades available. The 5th number within the parenthesis, 3, means that if no day trades were used on either Friday or Monday, then on Tuesday, the account would have 3-day trades available.



Examples of Day Trades


  • On Monday, 1000 shares of XYZ stock are purchased. Later on that same day, 1000 shares of XYZ stock are sold. This is considered to be a day trade.
  • On Wednesday, 1000 shares of XYZ stock are purchased. Later on that same day, 500 shares of XYZ stock are sold. This is considered to be a day trade.
  • On Monday, 500 shares of XYZ stock are purchased. Later on that same day, another 500 shares of XYZ are purchased. In after hours trading on Monday, 1000 shares of XYZ are sold. This is considered to be 1-day trade.
  • On Monday, 500 shares of XYZ stock are purchased. On Tuesday, another 500 shares of XYZ stock are purchased. Later on Tuesday, 500 shares of XYZ stock are sold. This is considered to be 1-day trade.
  • On Thursday, 500 shares of XYZ stock are purchased in pre-market. In after hours trading on Thursday, 200 shares of XYZ stock are sold. This is considered to be a day trade.
  • On Monday, customer sells short 10 YXX September 2005 90 calls and simultaneously buys 10 YXX December 2005 95 calls (combination order type). Later on Monday, customer buys back 5 YXX September 2005 90 calls and sells 5 YXX December 2005 95 calls for a profit. This is considered to be 2 day trades (one day trade for each leg of the spread).
  • On Thursday, customer buys 500 shares of YXZ stock. Later on Thursday, customer sells 1500 shares of YXZ stock (reversal creates new short position). On Friday, customer purchases 1000 shares of YXZ stock. This would be considered to be 1-day trade.


Non-Day Trade Examples:


  • On Monday, 500 shares of XYZ stock are purchased. On Tuesday, another 500 shares of XYZ stock are purchased. On Wednesday, 1000 shares of XYZ stock are sold. None of these are considered to be day trades.
  • On Thursday, customer buys 500 shares of YZZ stock. On Friday, customer sells 500 shares of YZZ stock. Later on Friday, customer buys 500 shares of YZZ stock. This is not considered to be a day trade.
  • On Friday, 1000 shares of XYZ stock are purchased. On the following Monday, 1000 shares of XYZ stock is sold. This is not considered to be a day trade.




Additional US Margin Requirements for Residents of the US


Use the following links to view any of our other US margin requirements:

Stocks

Options

Futures & FOPs

SSF - Single Stock Futures

Mutual Funds


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Further Reading


To learn more about trading on margin, go to our Education Center:

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Disclosures
  1. Grades are based on Moody's ratings.
    • Investment Grade – AAA to BAA3
    • Speculative Grade – BA1 to B3
    • Junk Grade – Below B3
  2. In order to apply other than 100% margin requirement, the bond must satisfy the following:
    • not private placement
    • not RegS
    • not Rule 144A
    • original issue size at least $25 million
  3. At this time, we are unable to provide additional details about the proprietary VAR methodology used to calculate margin for requirements of corporate bonds.

  • Due to regulatory restrictions, Interactive Brokers does not currently offer margin lending to natural persons who are residents of Australia.