CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
58.4% of retail investor accounts lose money when trading CFDs with IBKR.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The European Securities and Markets Authority (ESMA) enacted new rules applicable to retail clients trading CFDs, effective 1st August 2018. Professional clients are unaffected.
The rules consist of: 1) leverage limits; 2) a margin close out rule on a per account basis; 3) negative balance protection on a per account basis; 4) a restriction on the incentives offered to trade CFDs; and 5) a standardized risk warning.
Most clients (excepting regulated entities) are initially categorised as Retail Clients. IBKR may in certain circumstances agree to reclassify a Retail Client as a Professional Client, or a Professional Client as a Retail Client. Please see MiFID Categorisation for further detail.
The following sections detail how IBKR (UK) has implemented the ESMA Decision.
1 Leverage Limits
1.1 ESMA Margins
Leverage limits were set by ESMA at different levels depending on the underlying:
- 3.33% for major currency pairs; Major currency pairs are any combination of USD; CAD; EUR; GBP; CHF; JPY
- 5% for non-major currency pairs and major indices;
- Non-major currency pairs are any combination that includes a currency not listed above, e.g. USD.CNH
- Major indices are IBUS500; IBUS30; IBUST100; IBGB100; IBDE30; IBEU50; IBFR40; IBJP225; IBAU200
- 10% for non-major equity indices; IBES35; IBCH20; IBNL25; IBHK50
- 20% for individual equities
1.2 Applied Margins - Standard Requirement
In addition to the ESMA Margins, IBKR (UK) establishes its own margin requirements (IB Margins) based on the historical volatility of the underlying, and other factors. We will apply the IB Margins if they are higher than those prescribed by ESMA.
Details of applicable IB and ESMA margins can be found here.
1.2.1 Applied Margins - Concentration Minimum
A concentration charge is applied if your portfolio consists of a small number of CFD positions, or if the two largest positions have a dominant weight. We stress the portfolio by applying a 30% adverse move on the two largest positions and a 5% adverse move on the remaining positions. The total loss is applied as the maintenance margin requirement if it is greater than the standard requirement.
1.3 Funds Available for Initial Margin
You can only use cash to post initial margin to open a CFD position. Realized CFD profits are included in cash and are available immediately; the cash does not have to settle first. Unrealized profits however cannot be used to meet initial margin requirements.
1.4 Automatic Funding of Initial Margin Requirements (F-segments)
IBKR (UK) automatically transfers funds from your main account to the F-segment of your account to fund initial margin requirements for CFDs.
Note however that no transfers are made to satisfy CFD maintenance margin requirements. Therefore if qualifying equity (defined below) becomes insufficient to meet margin requirements, a liquidation will occur even if you have ample funds in your main account. If you wish to avoid a liquidation you must transfer additional funds to the F-segment in Account Management.
2 Margin Close Out Rule
2.1 Maintenance Margin Calculations & Liquidations
ESMA requires IBKR to liquidate CFD positions latest when qualifying equity falls below 50% of the initial margin posted to open the positions. IBKR may close out positions sooner if our risk view is more conservative. Qualifying equity for this purpose includes cash in the F-segment (excluding cash in any other account segment) and unrealized CFD P&L (positive and negative).
The basis for the calculation is the initial margin posted at the time of opening a CFD position. In other words, and unlike margin calculations applicable to non-CFD positions, the initial margin amount does not change when the value of the open position changes.
You have EUR 2000 cash in your CFD account. You want to buy 100 CFDs of XYZ at a limit price of EUR 100. You are first filled 50 CFDs and then the remaining 50. Your available cash reduces as your trades are filled:
|Cash||Equity*||Position||Price||Value||Unrealized P&L||IM||MM||Available Cash||MM Violation|
|Post Trade 1||2000||2000||50||100||5000||0||1000||500||1000||No|
|Post Trade 2||2000||2000||100||100||10000||0||2000||1000||0||No|
*Equity equals Cash plus Unrealized P&L
The price increases to 110. Your equity is now 3000, but you cannot open additional positions because your available cash is still 0, and under the ESMA rules IM and MM remain unchanged:
|Cash||Equity||Position||Price||Value||Unrealized P&L||IM||MM||Available Cash||MM Violation|
The price then drops to 95. Your equity declines to 1500 but there is no margin violation since it is still greater than the 1000 requirement:
|Cash||Equity||Position||Price||Value||Unrealized P&L||IM||MM||Available Cash||MM Violation|
The price falls further to 85, causing a margin violation and triggering a liquidation:
|Cash||Equity||Position||Price||Value||Unrealized P&L||IM||MM||Available Cash||MM Violation|
3 Negative Equity Protection
The ESMA Decision limits your CFD-related liability to the funds dedicated to CFD-trading. Other financial instruments (e.g. shares or futures) cannot be liquidated to satisfy a CFD margin-deficit.*
Therefore assets in the security and commodity segments of your main account, and non-CFD assets held in the F-segment, are not part of your capital at risk for CFD trading. However, all cash in the F-segment can be used to cover losses arising from CFD trading.
As Negative Equity Protection represents additional risk to IBKR, we will charge retail investors an additional financing spread of 1% for CFD positions held overnight. You can find detailed CFD financing rates here.
*Although we cannot liquidate non-CFD positions to cover a CFD deficit, we can liquidate CFD positions to cover a non-CFD deficit.
4 Incentives Offered to trade CFDs
The ESMA Decision imposes a ban on monetary and certain types of non-monetary benefits related to CFD trading. IBKR does not offer any bonus or other incentives to trade CFDs.
Interactive Brokers® review 2021
Interactive Brokers is definitely still geared toward active traders, though it’s introduced features that make it more suitable for newer investors as well.
- Interactive Brokers prides itself on its speedy trade execution and overall high-quality platform, with the ability to buy from seemingly any world market.
- The broker’s Lite tier allows smaller investors to get in the game without the commissions of the Pro platform, and fractional share buying is geared toward them.
- Uncommonly low margin rates are another attractive feature for more sophisticated investors
If the Pro platform’s commission structure turns you off, then you can turn to the no-commission Lite platform. Alternatively, you can opt for another major rival such as Charles Schwab or Fidelity Investments, both well-regarded for their investor-friendly service. Those looking for a wide selection of investments could have a look at TD Ameritrade, too.
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Bankrate is an independent, advertising-supported publisher and comparison service. Bankrate is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. This compensation may impact how, where and in what order products appear. Bankrate does not include all companies or all available products.
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Online brokerage Interactive Brokers Group Inc. recorded strong results and user growth in 2020 thanks to a surge in trading activity as markets contended with the COVID-19 pandemic.
The company saw its total number of accounts grow 56% at year-end compared with the fourth quarter of 2019. Total customer daily average revenue trades for the quarter were also up 165% from the year-ago quarter.
But the company's newest customers are trading less often than their older user base, and they appear to be trading on margin less as well. Clients with margin trading accounts can borrow directly from their brokerage to increase the amount of money on hand to trade with, giving them a shot at greater returns. Margin lending also gives the brokerage a stream of interest income.
Interactive Brokers added 383,000 net new accounts in 2020, up 56% from 2019. Customer equity jumped to $288.6 billion by year-end as well. But average margin balances as a percentage of overall client equity totaled 11.35% for the fourth quarter of 2020, versus 15.81% of client equity for the fourth quarter of 2019.
Interactive Brokers recorded $93 million in net interest income from margin lending in the fourth quarter of 2020, down from $157 million in the year-ago quarter.
Speaking on the company's Jan. 19 earnings call, founder and Chairman Thomas Peterffy said new clients are trading a little less than older accounts, "around 80% to 85% as much as the old ones," according to a transcript.
"I am mystified by the margin that is not increasing," Peterffy said in response to an analyst question about margin usage. "I am questioning why people who are out there at all these other brokers paying 3%, 4%, 5%, why they do not come over. I do not know the answer."
Interactive Brokers charges margin rates as high as 2.59% for its Lite account customers and as high as 1.59% for its Pro users as of Jan. 22, according to its website.
Interactive Brokers Review
As we’ve noted above, Interactive Brokers offers several different platform options. The flagship is the desktop IB Trader Workstation, which gives you access to securities trading, order management, charts and watch lists in one location. It also includes a wide range of investment tools, like the Options Strategy Lab, Volatility Lab, Market Scanners and Portfolio Builder, which can help you test out your investment ideas, research different markets and construct a diversified portfolio.
The platform gives you real-time access to market news and research from publications like Reuters, Dow Jones and Morningstar. It also allows you to view and create customizable charts that include an impressive range of indicators and tools to assist your research. Lastly, the column customization tool lets you track hundreds of data points about investments, such as market price, after-hours percentage change and month-to-month change. After you figure out which data points you want to follow, you can build them into a constantly updating custom spreadsheet.
IB Trader Workstation offers a ton of information and tools that are excellent for institutional and highly experienced investors but that may come with a bit of a learning curve. While they offer a demo account if you’d like to test it, beginner and recreational investors still may find all of the information overwhelming.
Fortunately, Interactive Brokers offers a couple of other alternatives. They have a simplified portal directly through their website, with no download necessary. This interface makes it easier to make trades, track your portfolio and see key metrics, like your net liquidation value. While it doesn’t offer quite as many research tools, it still allows you to track market news and access some charts for technical analysis, though with fewer data points than on the desktop version.
Finally, there’s IBKR Mobile, which works on both Android and iOS devices. It includes most of the features from the web service but far less than what’s available on the desktop version. Through the mobile app, you can still trade all available asset classes while accessing similar research resources as the other platforms.
For additional trading support, Interactive Brokers offers an AI tool called IBot that can answer questions or execute certain tasks. It also uses a predictive algorithm to suggest natural next steps, like asking if you want to make a trade after your initial question.
Interactive brokers rates margin
Interactive Brokers Review: Great for Large Balances, Low Margin Rates
Customers will find that Interactive Brokers has several different trading platforms designed for the needs of active traders and long-term investors alike. Its platform earns high reviews from active traders who appreciate access to a fully-featured trading platform on their desktop.
Here are the platforms Interactive Brokers has to offer:
Client Portal: Interactive Brokers' modern and user-friendly desktop trading platform. This is the easiest way for an investor to log in and place a trade on the platform. But all clients (IBKR Pro and Lite) have access to all three of these.
IB Trader WorkStation (TWS): TWS is a fully-featured desktop trading platform that offers all the functionality (and more!) that investors have come to expect from desktop solutions. Fully customizable, you can design your screen how you want to. Its watch list feature can include an extraordinary amount of information on every stock, from its P/E ratio to how many days it takes the company to sell its inventory, on average. TWS is chock full of screeners, stock option analysis tools, and backtesting options.
Mobile platforms: Interactive Brokers also offers a powerful mobile application for iOS and Android devices. The apps offer streaming data, charting tools, and the ability to place even the most complex trades from a mobile device. With access to over 120 worldwide markets, mobile users will find that there are no limitations on their ability to trade from the palm of their hand.
As long-term buy and hold investors, we don’t necessarily make full use of all the bells and whistles of a fully-featured trading platform. Frankly, the impressive functionality offered by its desktop platform, IB TWS, can be as much of an advantage for active traders as it is a disadvantage for inexperienced investors.
New investors seeking a good stock broker for beginners may be put off by all the moving parts of its desktop platform. Even the basics can be overwhelming since the platform is built to offer access to so many different markets. For example, after entering a ticker symbol for a popular ETF, the platform prompted us to select whether we wanted a quote for the stock, options, or futures contracts based on its value. It’s simple to navigate, but new investors may be lost in the shuffle.
Interactive Brokers braces for election volatility by telling clients to put up more cash
A margin account contains money that a broker lends an investor to buy stocks, options and ETFs. The margin requirement is the smallest amount of money than an investor must have in their account after they buy a certain security. There are standard Financial Industry Regulation Authority (FINRA) requirements but brokers option slap on a higher minimum for their own security.
Interactive Brokers— which serves 876,000 broker accounts — typically has a 50% initial margin requirement and a 25% maintenance requirement. The new levels bring the initial requirement to 67.5% and a maintenance requirement of 33.75%.
Traders are expecting elevated volatility ahead of the 2020 election between incumbent President Donald Trump and Democratic nominee and former Vice President Joe Biden. The Cbeo volatility index, an gauge of investor fear, currently sits around 26, but is expected to jump above 32 in November, according to futures pricing. Wall Street generally views Trump as good for the economy, but his trade relationship with China as too delicate. Investors expect Biden to raise the corporate tax rate and push health care legislation that would dent public health providers. Plus, both candidates are facing a pandemic and flurry of social justice protests.
The chances of a contested election are also on the rise, as more people are expected to vote by mail because of the coronavirus pandemic. This means it could take longer for the official results to be determined or could result in discourse over voter fraud.
"Option prices indicate expectations of an extended period of high volatility beginning around Election Day and lasting for months thereafter," Goldman Sachs said in a note to clients last week. "Implied volatility jumps around Election Day, pricing an S&P 500 move of nearly 3%, and the term structure remains elevated well into early 2021."
Interactive Brokers said the increase will be implemented gradually each day starting on September 28 and reaching the new level by October 23.
In April, the broker said it took an $88 million hit when crude oil collapsed to the unprecedented negative price of $37.63 per barrel and a handful of its traders were caught in long positions in excess of the equity in their accounts.
"We are continuously evaluating the current market environment and our margin requirements are a reflection of that," Steve Sanders, EVP of marketing and product development at Interactive Brokers, told CNBC.
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— with reporting from CNBC's Senior Markets Commentator Michael Santoli.
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Interactive Brokers Raises Margin Requirements
Interactive Brokers' clients were greeted with an email informing them of an increase in margin requirements leading up to the November elections in the United States.
The letter states that initial margin requirements will rise up to 35% from normal levels starting September 28th through October 23rd. Maintenance margin requirements will increase in a similar manner between October 5th and October 30th. The updates will be made each day following the market's close in New York, and will be effective the next trading day. By regulation, brokers usually loan their clients 50% of the value of a new position, and 25% to maintain a current position. This will increase gradually to 67.5% for a new position and 33.75% for maintenance.
The initial margin is the percentage of the purchase price of a security that must be covered by cash or collateral when using a margin account. The current initial margin requirement set by the Federal Reserve Board’s Regulation T is 50%, but this regulation is only a minimum requirement. Equity brokerage firms may set their initial margin requirement higher than 50%. A margin account is essentially a line of credit in which interest is charged on the outstanding margin balance.
Large Provider of Margin Loans
Interactive Brokers is one of the largest providers of margin loans globally, charging extremely low interest. According to its most recent filing with the SEC, as of June 30, 2020, approximately $25.7 billion of customer margin loans were outstanding. Interest rates on margin loans are currently 0.75% to 2.59% in the U.S. Investopedia named Interactive Brokers as its best broker for international trading, best for day trading, and best for low margin rates in 2020.
In April 2020, IBKR took a loss of approximately $88 million due to the huge drop in the price of contracts for New York Mercantile Exchange West Texas Intermediate May crude oil to negative $37.63. According to a report on Seeking Alpha, several customers held long positions in these contracts, and their losses exceeded the equity in their accounts. IBKR fulfilled the margin settlements with the affected clearinghouses on its customers' behalf.
Interactive Brokers said in the email that it, "may make additional changes to the margin on certain products, or all products, depending on volatility. This includes changes built into the standard margin model as well as any new house margin requirements that may be imposed."
Will There Be More Changes?
Steve Sanders at Interactive Brokers, says, "We are continuously evaluating the current market environment and our margin requirements are a reflection of that assessment." There was no press release issued on this topic as the firm doesn't announce operations policy.
The margin agreement that customers sign with Interactive Brokers states that the firm may request additional margin collateral from customers and may sell securities that have not been paid for or purchase securities sold but not delivered from customers, if necessary.
What Other Brokers are Saying
It appears that Interactive Brokers is the only major firm updating its margin requirements at this point. But they are also the only brokerage to take a major margin-based loss this year due to market volatility. Granted, that volatility was in the crude oil market rather than in stocks, but margin practices are extended to any asset class that involves risk to the lender.
Tom Sosnoff of tastyworks said, "We have not changed our requirements and we have no plans to do so." Rosaline McNeil from SogoTrade says, "We will not be making any changes at this time." Shawn Herrin of eOption says his firm has not made any changes to its existing margin structure in the last month, adding, "At this time, we have not made a decision to modify existing margin requirements. Typically, we make adjustments on a name-to-name basis depending on circumstances. Biotechs are one example of high volatility names that may require increases in requirements from time to time."
Joe Ely of Lightspeed tells us, "Lightspeed Financial Services Group (LSFS) employs a sophisticated, dynamic risk methodology that quickly reacts to market volatility. We will continue to adhere to our policy and make adjustments as needed on an account level or symbol basis, which should preclude the need for a wholesale change to margin requirements across the board."
"TradeStation has no immediate plans to alter margin policy," says Jeff Peters. "Our Trade Operations and Risk teams will remain diligent and if market conditions warrant, take appropriate action to manage and mitigate risk. Any modifications or enhancements made to margin policy will be effectively communicated."
At Charles Schwab, Jeff Chiappetta, Vice President of Trading Services says that margin requirements are constantly reviewed and changed based on market, sector, or individual security volatility and risk. "We take a more conservative approach to margin/leverage than many competitors so when known events, like the election, are on the horizon we don’t need to make drastic changes, he says.
A spokesperson for Ally Invest tells us, "Ally Invest closely monitors its margin requirements and market volatility and routinely makes adjustments where we feel necessary to help mitigate risk. However, at this point, we have not planned any broad based systemic changes to our margin requirements."