Introduction to Margin: Margin Accounts
We offer a cash account which requires enough cash in the account to cover transaction plus commissions, and a margin account that is based on IB risk margin models. New customers must select an account type during the application process.
Requirements and supported products for each of these accounts are detailed in the Account Types section on the Choosing and Configuring Your Account page on our website.
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.
Securities Initial and Maintenance Margin
The percentage of the purchase price of securities that an investor must pay for is called the initial margin. To buy securities on margin, the investor must first deposit enough cash or eligible securities with a broker to meet the initial margin requirement for that purchase.
Once an investor has started buying a stock on margin, it is required that a minimum amount of equity be maintained in the investor's margin account. This is called the maintenance margin. 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. IB generally will not issue margin calls and will
liquidate account positions in order to satisfy Margin Requirements without prior notice. If you are trading in a
Margin Account, you must ensure that you have sufficient equity in the account at all times.
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.
Commodities Margin Definition
Commodities margin is the amount of equity contributed by an investor to support a futures contract. This can be expressed as a simple equation:
Collateral = Amount of Equity Required to Support Futures Contract
Collateral >= Margin Requirement
Margin requirements for futures and futures options are established by each exchange through a calculation algorithm known as SPAN margining. SPAN (Standard Portfolio Analysis of Risk) evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of derivative and physical instruments might reasonably incur over a specified time period (typically one trading day.) This is done by computing the gains and losses that the
portfolio would incur under different market conditions. The most important part of the SPAN methodology is the
SPAN risk array, a set of numeric values that indicate how a particular contract will gain or lose value under various
conditions. Each condition is called a risk scenario. The numeric value for each risk scenario represents the gain or
loss that that particular contract will experience for a particular combination of price (or underlying price) change,
volatility change, and decrease in time to expiration.
Commodities Initial and Maintenance Margin
Just like securities, commodities have required initial and maintenance margins. These are typically set by the individual exchanges as a percentage of the current value of a futures contract, based on the volatility and price of the contract. The initial margin requirement for a futures contract is the amount of money you must put up as collateral to open position on the contract. To be able to buy a futures contract, you must meet the initial margin requirement, which means that you must deposit or already have that amount of money in your account.
Maintenance margin for commodities is the amount that you must maintain in your account to support the futures contract and represents the lowest level to which your account can drop before you must deposit additional funds. Commodities positions are marked to market daily, with your account adjusted for any profit or loss that occurs.
Because the price of underlying commodities fluctuates, it is possible that the value of the commodity may decline
to the point at which your account balance falls below the required maintenance margin. If this happens, brokers
typically make a margin call, which means you must deposit additional funds to meet the margin requirement.
IBHK Margin Model
IBHK utilizes a risk-based margin similar to the Risk-based margin systems applied by Exchanges where they 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).
IBHK will not enforce rules and regulations common to US based margin trading including Reg T,
minimum equity requirements, and pattern day trading rules.
IBHK Real-Time Margining
We use real-time margining to allow you to see your trading risk at any moment of the day. Our real-time margin system applies 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.
The Account Window in Trader Workstation (demo or customer account) shows your margin requirements at any time.
Supplemental 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. We
have 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.
We also apply a concentrated margining requirement to margin accounts. An account's two
largest positions and their underlying derivatives will be re-valued using the worst case scenario
within a +/- 30% scanning range. The remaining positions will be re-valued based upon a move
of +/-5%. If the concentrated margining requirement exceeds that of the standard rules based
margin required, then the newly calculated concentrated margin requirement will be applied to
If you sell a security short, you must have sufficient equity in your account to cover any fees
associated with borrowing the security. If you borrow the security through us, we will borrow the
security on your behalf and your account must have sufficient collateral to cover the margin
requirements of the short sale. To cover administrative fees and stock borrowing fees, we must
post 102% of the value of the security borrowed as collateral with the lender. In instances in
which the security shorted is hard to borrow, borrowing fees charged by the lender may be so
high (greater than the interest earned) that the short seller must pay additional interest for the
privilege of borrowing a security. Customers may view the indicative short stock interest rates
for a specific stock through the Short Stock (SLB) Availability tool located in the Tools section
of their Account Management page. For more information concerning shorting stocks and
associated fees, visit our Stock Shorting page.