Introduction to Margin: IB Margin Accounts
Interactive Brokers Canada offers several account types, including a cash account which requires enough cash in the account to cover transaction plus commissions, and a Margin account. New customers must select an account type during the application process, and existing customers can upgrade from Cash to Margin, via the Trading Access menu in Account Management.
Requirements and supported products for each of these accounts are detailed on the Account Types tab of the Trading Configuration page.
||How We Calculate Margin
||Borrowing to support equities trading, shorting of equities, options trading, futures/futures options trading, currency conversions and securities/commodities trading in multiple currency denominations available. Purchase and sale proceeds are immediately recognized.
||Margin requirements are computed in real-time under a rules-based calculation methodology, with immediate position liquidation if the minimum maintenance margin requirement is not met.
At IB, margin has a different meaning for securities versus commodities. For securities, margin is the amount of cash a client borrows from IB. For commodities, margin is the amount of cash a client must put up as collateral to support a futures contract.
The definition of margin includes three important concepts: the Margin Loan, the Margin Deposit and the Margin Requirement. The Margin Loan is the amount of money that an investor borrows from his broker to buy securities. The Margin Deposit is the amount of equity contributed by the investor toward the purchase of securities in a margin account. The Margin Requirement is the minimum amount that a customer must deposit and it is commonly expressed as a percent of the current market value. The Margin Deposit can be greater than or equal to the Margin Requirement. We can express this as an equation:
Margin Loan + Margin Deposit = Market Value of Security
Margin Deposit >= Margin Requirement
Borrowing money to purchase securities is known as "buying on margin". When an investor borrows money from his broker to buy a stock, he must open a margin account with his broker, sign a related agreement and abide by the broker's margin requirements. The loan in the account is collateralized by investor's securities and cash. If the value of the stock drops too much, the investor must deposit more cash in his account, or sell a portion of the stock.
Initial and Maintenance Margin
The Investment Industry Regulatory Organization of Canada (IIROC) is the national self-regulatory organization which oversees all investment dealers in Canada. It has clear rules regarding margin trading. In Canada, IIROC margin rules allows investors to borrow up to 70 percent of the price of the securities to be purchased on margin (If the stock is eligible for reduced margin and listed on the LSERM list published by IIROC). The percentage of the purchase price of securities that an investor must pay for is called the margin requirement. To buy securities on margin, the investor must first deposit enough cash or eligible securities with a broker to meet the margin requirement for that purchase.
When the balance in the margin account falls below the maintenance requirement, the broker can issue a margin call requiring the investor to deposit more cash, or the broker can liquidate the position.
Brokers also set their own minimum margin requirements called "house requirements". Some brokers extend more lenient lending conditions than others and lending terms may also vary from one client to the other but brokers must always operate within the parameters of margin requirements set by regulators.
Not all securities can be bought on margin. Buying on margin is a double-edged sword that can translate into bigger gains or bigger losses. In volatile markets, investors who borrowed from their brokers may need to provide additional cash if the price of a stock drops too much for those who bought on margin or rallies too much for those who shorted a stock. In such cases, brokers are also allowed to liquidate a position, even without informing the investor. Real-time position monitoring is a crucial tool when buying on margin or shorting a stock.
IB Real-Time Margining
Interactive Brokers uses real-time margining to allow you to see your trading risk at any moment of the day. Our real-time margin system applies maintenance margin requirements throughout the day to new trades and trades already on the books and enforces initial margin requirements at the end of the day, with real-time liquidation of positions instead of delayed margin calls. This system allows us to maintain our low commissions because we do not have to spread the cost of credit losses to customers in the form of higher costs.
Our real-time margin system allows you to see your trading risk at any moment of the day using the real-time activity monitoring features in Trader Workstation. For more information about real-time margin monitoring, see the Real-Time Monitoring Margin page.
Margin requirements are calculated either on a rules basis and/or a risk basis.
|Margin Calculation Basis
||Available IB Products
|Rule-Based Margin System: Predefined and static calculations are applied to each position or predefined groups of positions (“strategies”).
||Margin accounts: US stocks, index options, stock options, single stock futures, and mutual funds.
All accounts: Forex; bonds; Canadian, European, and Asian stocks; and Canadian stock options and index options.
|Risk-Based Margin System: Exchanges consider the maximum one day risk on all the positions in a complete portfolio, or subportfolio together (for example, a future and all the options delivering that future).
||Portfolio Margin accounts (not available to IB Canada customers): US stocks, index options, stock options, single stock futures, and mutual funds.
All accounts: All futures and future options in any account. Non-US/Non-Canadian stock options and index options in any account.
Margin requirements for each underlying are listed on the appropriate exchange site for the contract. A summary of the requirements for the major futures contracts as well as links to the exchange sites are available on our Futures Margin Requirements page.
Extreme Margin Model
Systems that derive risk-based margin requirements deliver adequate assessments of the risk for complex derivative portfolios under small/moderate move scenarios. Such systems are less comprehensive when considering large moves in the price of the underlying stock or future. IB has enhanced the basic exchange margin models with algorithms that consider the portfolio impact of larger moves up 30% (or even higher for extremely volatile stocks). This 'Extreme Margin Model' may increase the margin requirement for portfolios with net short options positions, and is particularly sensitive to short positions in far out-of-the-money options.
- In the interest of ensuring the continued safety of its clients, IB may modify certain margin policies to adjust for unprecedented volatility in financial markets. The changes will promote reduction of leverage in client portfolios and help ensure that clients’ accounts are appropriately capitalized.
- IB is focused on prudent, realistic, and forward looking approaches to risk management. In order to provide the broadest notification to our clients, we will post announcements to the IB System Status page. We strongly encourage all clients to monitor this web page for advance alerts regarding margin policy changes.
- Note that the credit check for order entry always considers the initial margin of existing positions. Therefore, although an account may be holding an existing position at 35%, for example, it is the initial margin requirement of that position that is used in the credit check calculation for order acceptance.