How is this very low margin interest rate possible?

[guru]

Yeah, I have kept tabs for day to day interest many times and they charge $0 for no margin used overnight and if used they only charge interest for the portion used and not for all margin qualified. For example, they provide 43:1 USD.CAD margin which I understand is $4.3 million for every $100k cash in account. If they did charge it will be $99+ for 24 hours for just having a margin account opened and not even using the margin; but that doesn't happen.

P.S. the 43:1 calculation is I think not as simple as $4.3 million for every $100k as I think it's a higher ratio provided. It's like a compound 43:1 ratio...so don't take my calculation as set in stone there.

No, I meant that IB requires/reserves/uses/charges a lot of margin after you perform a trade and hold it for several days/weeks/months. Obviously they cannot charge margin on trades that I want to make, but on trades that I actually made.
For example when I sell 125 qty of SPX 2000-strike puts 1 year out then IB will require $1 million margin and charge me interest on $1 million after I made such trade and hold it overnight:

But another broker may require only $500K margin for the same trade, or may allow me to sell 250 qty instead of 125, with the same margin.
(the margin shown is an example, as I'm heavily hedged while without hedging the margin for this trade may be worse/higher)

BTW, I personally know someone who does exactly this - sells hundreds of options (puts & calls) at another broker, but I cannot sell them at IB because IB requires too much margin (and I understand that).

 

[salamanderforex]

No, I meant that IB requires/reserves/uses/charges a lot of margin after you perform a trade and hold it for several days/weeks/months. Obviously they cannot charge margin on trades that I want to make, but on trades that I actually made.
For example when I sell 125 qty of SPX 2000-strike puts 1 year out then IB will require $1 million margin and charge me interest on $1 million after I made such trade and hold it overnight:

View attachment 241568

But another broker may require only $500K margin for the same trade, or may allow me to sell 250 qty instead of 125, with the same margin.
(the margin shown is an example, as I'm heavily hedged while without hedging the margin for this trade may be worse/higher)

BTW, I personally know someone who does exactly this - sells hundreds of options (puts & calls) at another broker, but I cannot sell them at IB because IB requires too much margin (and I understand that).

I don't like the loose terms broker use but I guess there is no consensus. I see now what you mean by "reserve". In IB terms that is called "Maintenance". See "Currency Maintenance Margin" in Account window. I bet you use account window.

Side note: The window you showed is the order window which YES shows the impact or expected amount that would be added to your maintanence margin. If you press Submit (one step) further it will also show your current *initial margin and the *change and the *total margin after this specific order is executed. Not every product has the same margin ratio that is true. Even different pairs of currency have different ratios. This is expected because each instrument carries a different type of risk.

Back to topic:
So yeah as I said in previous posts maintenance or margin ratio (your reserve word) has nothing to do with interest rate. It has to do with amount of risk they like to take as a business.

Also, IB is I think still very good with their margin ratios for Forex and regular stocks. I don't do Options and if you think that is a very low ratio then it is a weakness/trade-off for options. But if your screenshot is showing a very risky trade then the ratio is probably not bad; again I don't do Options so maybe you can tell us if this a weakness. Can you tell us how much that SPX 2000 can swing in a day? What is your potential loss or profit if you executed that exact order? I am guessing it's highly risky.

For USD.CAD for example, IB needs ~$111,363 USD maintenance for $4,000,000 USD so that is like 2.784% which is a very good ratio. No need to look elsewhere.

 

[def]

Guru - unless I am reading your comment incorrectly, your explanation on margin requirements would mean we actually earn less. Example:
Assume for simplicity:
Broker A has 40% maint margin requirement,
IBKR has 50%

You have $100. Broker A lends you up to $60 and you would pay interest on $60. IBKR would lend you up to $50 and you would pay interest on the $50 borrowed.

As for margin rates, it has always been the philosophy to offer a professional product which means small markups over cost of funds. We do that by focusing on automation and efficiency.

 

[salamanderforex]

Guru - unless I am reading your comment incorrectly, your explanation on margin requirements would mean we actually earn less. Example:
Assume for simplicity:
Broker A has 40% maint margin requirement,
IBKR has 50%

You have $100. Broker A lends you up to $60 and you would pay interest on $60. IBKR would lend you up to $50 and you would pay interest on the $50 borrowed.

As for margin rates, it has always been the philosophy to offer a professional product which means small markups over cost of funds. We do that by focusing on automation and efficiency.

LOL that in a way is true but it's not good reasoning. Clients want the most available margin AND the lowest rates. Also, you can't assume that Guru will use 100% of his margin. In fact probably most people don't use over 50-80% of their margin so the margin doesn't get called.

I think you have nailed it with the word "efficiency". I think IBKR system is so efficient that it can allocate resources quickly and feel safe at these low rates. Rest of of brokers have to up their game in IT.

 

[guru]

Guru - unless I am reading your comment incorrectly, your explanation on margin requirements would mean we actually earn less. Example:
Assume for simplicity:
Broker A has 40% maint margin requirement,
IBKR has 50%

You have $100. Broker A lends you up to $60 and you would pay interest on $60. IBKR would lend you up to $50 and you would pay interest on the $50 borrowed.

As for margin rates, it has always been the philosophy to offer a professional product which means small markups over cost of funds. We do that by focusing on automation and efficiency.

A better example would be a single trade. Broker A would require small margin and lend me $20, while IB would require larger margin on the same trade and lend me $50 (yes, there are cases with such large differences). Then I'd pay 5% on $20 to the first broker, while 2% on $50 to IB.
Also, if I can place more trades at Broker A then I may be able to make more money.

I believe that IB still comes best in most if not all cases, this was just rough example to illustrate that those margins and interest rates may not be straightforward to compare.

 

[salamanderforex]

Oooo and do NOT ever use 100% of your available margin beacause margin is dynamic. It changes

A better example would be a single trade. Broker A would require small margin and lend me $20, while IB would require larger margin on the same trade and lend me $50 (yes, there are cases with such large differences). Then I'd pay 5% on $20 to the first broker, while 2% on $50 to IB.
Also, if I can place more trades at Broker A then I may be able to make more money.

I believe that IB still comes best in most if not all cases, this was just rough example to illustrate that those margins and interest rates may not be straightforward to compare.

What you say is true as well but also not good reasoning for same reason I mentioned to Def I think.

You are both hammering the same coin on different sides. Both are talking about very improbable potential gains and losses that are way too stretched and probably not used by many.

I think margin ratio for most products are enough from IB and that is exactly why their rates are good hands down.

I would still like to hear what your daily average risk can be with that sample you posted a picture of.

Thanks,

 

[guru]

I would still like to hear what your daily average risk can be with that sample you posted a picture of.

The absolute/max risk on that trade generally would be $25M, while IB margin was $1M for me and may be more than $1M for others (may be lower for me because I have some hedges that would lower my risk). The margin would quickly increase if SPX drops.
This doesn't look too bad right now, but there are many examples with options and option combos where you can make trades with reasonable risk but unable to, due to high margin requirements. That would require a longer discussion, especially if you don't trade options.
Though I get your point that my previous example illustrates reasonable margin vs its high risk. And that specific trade may even use up more margin at other brokers. I just tried to show that I'm referring to margin on a trade, vs margin available on the account.

 

[salamanderforex]

The absolute/max risk on that trade generally would be $25M, while IB margin was $1M for me and may be more than $1M for others (may be lower for me because I have some hedges that would lower my risk). The margin would quickly increase if SPX drops.
This doesn't look too bad right now, but there are many examples with options and option combos where you can make trades with reasonable risk but unable to, due to high margin requirements. That would require a longer discussion, especially if you don't trade options.
Though I get your point that my previous example illustrates reasonable margin vs its high risk. And that specific trade may even use up more margin at other brokers. I just tried to show that I'm referring to margin on a trade, vs margin available on the account.

You brought up a good point and related even if not exactly about the interest rates so thank you for that.

I don't use any hedging. Can you provide a realistic example of a hedge that one can use for SPX or anything else?

 

[guru]

I don't use any hedging. Can you provide a realistic example of a hedge that one can use for SPX or anything else?

Not sure how familiar you're with options, but here are a few examples, using SPX options/puts:
Single put (expensive):

Ratio Spread (less expensive but with risk if SPX really falls off the cliff):

Back Ratio Spread:

Butterfly:

Calendar/Diagonal (selling one put that expires soon, while buying one that expires later):

And there are lots of ways to alter or combine the above, so really no two hedges are the same.
Hope this helps

 

[xandman]

Is the margin rate also applied to derivatives margin?

I thought it was only for equity margin balances.