Margin Requirements: 'reduction of Leverage'?

[pb2013 10]

Hello all- Questions from a 'newbie', hoping someone here can help answer the following:

Interactive Brokers uses the following language in their documents describing their margin process & policies:

 

"In the interest of ensuring continued safety of it's 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 client's accounts are appropriately captialized".

Can anyone explain precisely what this means? I have 3 questions:

 

I1) did follow up with them in a chat session, and, not surprisingly, was not able to learn how or what their definition of 'unprecedented volatility' means... am wondering if there is *any*measurability to this term, ie a rule of thumb percentage, at least?

 

2) For example: if I am leveraged at say, 4 to 1, and they decide to reduce leverage to 2 to 1, it appears they can make this decision, and sell your holdings without any notification to you, not even a margin call is required, as soon as they change their policy. GAHH!

 

3) What happens to your capital/the cash in your account, if, for example, the sale of your shorts was not enough to cover the margin amount originally borrowed?

 

I'm guessing they can your cash too, but can't find that answer anywhere so far.

 

BTW, I am only talking about shorting equities here, not futures.

 

Thanks for any help or providing some suggestions as to where I can find this info.

Hope you all are having a profitable season.

[pb2013 10]

Bumping this up again in the hope that someone can direct me to an answer... Looks like 53 people have viewed this so far, so maybe I'm not the only one who has a question about this? thanks for any help - pb

[MadMarketScientist 11]

I certain this is just to cover their @ss in case of a black swan event ... and probably directed at the whales. Unless your a whale, I doubt they will need to reduce the margin on your account.

 

MMS

[SIUYA 11]

  pb2013 said:

Hello all- Questions from a 'newbie', hoping someone here can help answer the following:

Interactive Brokers uses the following language in their documents describing their margin process & policies:

 

"In the interest of ensuring continued safety of it's 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 client's accounts are appropriately captialized".

Can anyone explain precisely what this means?

 

As MMS said - its designed to protect the other accounts from excess leverage as all accounts are effectively mingled if you are using leverage and dont have a cash account whereby the stocks are in your own name.

 

  pb2013 said:

I have 3 questions:

 

I1) did follow up with them in a chat session, and, not surprisingly, was not able to learn how or what their definition of 'unprecedented volatility' means... am wondering if there is *any*measurability to this term, ie a rule of thumb percentage, at least?

 

2) For example: if I am leveraged at say, 4 to 1, and they decide to reduce leverage to 2 to 1, it appears they can make this decision, and sell your holdings without any notification to you, not even a margin call is required, as soon as they change their policy. GAHH!

 

3) What happens to your capital/the cash in your account, if, for example, the sale of your shorts was not enough to cover the margin amount originally borrowed?

 

I'm guessing they can your cash too, but can't find that answer anywhere so far.

 

BTW, I am only talking about shorting equities here, not futures.

 

1...yes good luck - very few measures of risk are adequate and IB have moved the margin required for certain stocks on occasion based on market capitalisaton as well...not just volatility. Remembering that they may be adjusting the margins required based on what they see as excess volatility, or because they have a lot of clients taking risk in certain sectors - these are all designed to ideally protect the overall pool of client money that is leveraged.

 

2...They reduce your leverage by increasing you margin - as I understand it this may be done either on an account by account basis, OR a individual stock name basis. From what I have seen in the notifications is that they usually give you a few days notice. Its not a lot, and that is why you need to monitor it, and also have a little bit of excess margin just in case. Yes - they can sell you out, and the process they use may not sell out the instruments you would choose. They may sell out those instruments that are more liquid because they can.....all again designed to protect the pool of clients.

 

3....not 100% sure what you mean here....

Assuming you are short equities and you have a cash deposit against these shorts (they then apply the cash as the margin), and if your shorts are closed because the margin was not large enough, then as the position is closed any cash not used for margin goes back into the account. If there is not a loss then they should simply buy enough of the short back to ensure the balance is covered. Any extra cash remains in the account assuming its not simply eaten up by a loss.

 

BASICS - (this is simplistic)

eg; deposit $100 to short $500 of stock ABC. (margin 20% = leverage 5:1)

Cash bal 0, short stock bal $500, PL =0

Assume stock does not move BUT they increase margin (new margin 50% = leverage 2:1).....

Cash Bal 0, short stock bal $250, PL=0 --- you need to purchase some of the short back

 

Note: nothing else really changes......!

If there is a loss on the stock then they will need to reduce your short stock balance by more to offset the loss.

 

I have seen more detailed responses on IB on other forums - just google it, and it varies regards longs offsetting shorts etc.

 

As I understand it IB built a lot of their systems in conjunction with their associated market making firm Timberhill and so the accounts and leveraging requirements are pretty good.

[Niko 10]

  pb2013 said:

Hello all- Questions from a 'newbie', hoping someone here can help answer the following:

Interactive Brokers uses the following language in their documents describing their margin process & policies:

 

"In the interest of ensuring continued safety of it's 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 client's accounts are appropriately captialized".

Can anyone explain precisely what this means? I have 3 questions:

 

I1) did follow up with them in a chat session, and, not surprisingly, was not able to learn how or what their definition of 'unprecedented volatility' means... am wondering if there is *any*measurability to this term, ie a rule of thumb percentage, at least?

 

2) For example: if I am leveraged at say, 4 to 1, and they decide to reduce leverage to 2 to 1, it appears they can make this decision, and sell your holdings without any notification to you, not even a margin call is required, as soon as they change their policy. GAHH!

 

3) What happens to your capital/the cash in your account, if, for example, the sale of your shorts was not enough to cover the margin amount originally borrowed?

 

I'm guessing they can your cash too, but can't find that answer anywhere so far.

 

BTW, I am only talking about shorting equities here, not futures.

 

Thanks for any help or providing some suggestions as to where I can find this info.

Hope you all are having a profitable season.

 

 

If you are a newbie, the least of your problems is leverage. In fact too much leverage is one of the reasons why most newbies lose everything in a few months if not days. If you are not a newbie and dont like IB just change brokers, or trade futures where you can get 100 to one leverage or more, but again.... That is dangerous.

[pb2013 10]

  MadMarketScientist said:

I certain this is just to cover their @ss in case of a black swan event ... and probably directed at the whales. Unless your a whale, I doubt they will need to reduce the margin on your account.

 

MMS

 

Thank you. I'll guess 'black swan' is something horrible that sends the market hurtling down, and that whales are the biggest players? @ss I don't have to guess at.

Trying to be very cautious here, will share if I find out anything more. thanks.

[pb2013 10]

  SIUYA said:

... ~excerpt~

 

Note: nothing else really changes......!

If there is a loss on the stock then they will need to reduce your short stock balance by more to offset the loss.

 

I have seen more detailed responses on IB on other forums - just google it, and it varies regards longs offsetting shorts etc.

 

As I understand it IB built a lot of their systems in conjunction with their associated market making firm Timberhill and so the accounts and leveraging requirements are pretty good.

 

--

Siuya-thank you so much for this! What you're saying jibes with what we're learning, and your basic exampl helps too. I really appreciate your taking the time to respond so thoroughly. Not to be greedy, but one more question for you please?

 

Q: Do you know how or where I can find out how often IB has done this,or at least some bit of history?

 

We're very concerned since it seems like they can 'pull the rug out' from under you, basically changing the rules in the middle of the game--all the cards are in their hands.

I mean, if you borrowed money from a bank or similar,. at a particular interest rate, that rate would apply for transactions going forward, but they couldn't come back and change the rate retroactively to money borrowed in the past.

 

From what we're learning here, it sounds like the brokers can do just that.

So... wouldn't that sometimes result in wiping people out completely? How often does that happen and how does a brokerage firm survive wiping out its customer base?

 

Sorry, my real question is in 'Q'. above, the rest is my anxiety talking.

Thanks again for your help.

[pb2013 10]

  Niko said:

If you are a newbie, the least of your problems is leverage. In fact too much leverage is one of the reasons why most newbies lose everything in a few months if not days. If you are not a newbie and dont like IB just change brokers, or trade futures where you can get 100 to one leverage or more, but again.... That is dangerous.

 

Niko- I don't know enough to 'dislike' IB, per se, just trying to understand how this reducing leverage/increasing margin stuff works.

I do understand that using leveage can be *very* dangerous, even for folks who know what they're doing. And futures/options are not even on the table for us right now, too risky and we are being very careful. Thanks for your comment.

[SIUYA 11]

  pb2013 said:

--

 

Q: Do you know how or where I can find out how often IB has done this,or at least some bit of history?

 

We're very concerned since it seems like they can 'pull the rug out' from under you, basically changing the rules in the middle of the game--all the cards are in their hands.

I mean, if you borrowed money from a bank or similar,. at a particular interest rate, that rate would apply for transactions going forward, but they couldn't come back and change the rate retroactively to money borrowed in the past.

 

From what we're learning here, it sounds like the brokers can do just that.

So... wouldn't that sometimes result in wiping people out completely? How often does that happen and how does a brokerage firm survive wiping out its customer base?

 

 

You are right to be anxious about it as it is a very real possibility - a risk of using leverage....however I think you just need to be aware of it and be aware of how it affects any portfolio you might have, and have plans in places for what to do when (not if) it occurs.

You will either need to deposit more money quickly, OR reduce exisiting positions...or they will do the later for you.

All brokers can do this, at any time if they are lending you money, and banks can and do as well -( but is unlikely to due to the illiquidity of the housing market in such short time frames....ever re financed a mortgage? Just because rates are at 2% now does not mean they might not jump to 10%. Unless you have a fixed 30 year mortgage, your rate is likely floating or needs renegotiation - this might not come out in your favour.)

 

If a broker increases the margin they are using doing it for protective reasons like excessive volatility, or a skewed book.. ..... (they also might be doing it to bring extra money in the door as they are in trouble - but that does not happen right! )

 

The other thing you should remember is that a margin call does not wipe you out....bad trading, sitting on losses and being forced out of those will wipe you out. If you have a margin call on a profitable position you just need to reduce the position....and need to be given enough time to do this.

 

One reason why many fail in this business is because they are undercapitalised right from the start, and then they use too much leverage --- this is not the brokers fault....and if the broker is constantly increasing margins to crush its customers then its probably because its customers are all sailing too close to the edge with too much leverage, otherwise it might be considered rather short sighted for a large broker to burn all its customers.

(Stories of individual accts getting margined out by the likes of goldmans do abound! It can and does happen)

 

.............

As for history (after my rather long disclaimer above )- sorry i have no idea have you even asked Interactive brokers for that?

(sometimes they increase margins because an exchange requires them, or on certain low market capitalised stocks, this has happened to me and i had a few days to adjust my position with no problem)

 

You have probably allready found it but some web sites are

http://www.interactivebrokers.com/en/index.php?f=marginnew&p=overview2

http://www.interactivebrokers.co.uk/en/index.php?f=4745

 

they also have numerous types of accounts with varying margin requirements....they offer lots of information but practically no help - that is left up to you.

One thing people dont like about IB is that they are quick to change margins - this is a downside to using them i guess - a lot depends on how you trade.

 

A quick google found this for some reading as well - i have not read much but it looked ok at a glance

http://www.themargininvestor.com/blog.html

Edited March 21, 2013 by SIUYA

[Galacticus 10]

  pb2013 said:

Hello all- Questions from a 'newbie', hoping someone here can help answer the following: ...

 

Thanks for any help or providing some suggestions as to where I can find this info.

Hope you all are having a profitable season.

 

Use options to recover margins (and also protect).

 

Now have also been introduced the new "mini-option" which are quite convenient

(with a 10 multiplier)