IB accrued interest

[rayl]

This is a long thread but I found it very helpful. As a new customer who is generally very impressed by IB's offering, I too was perplexed about how IB calculates rollover interest. Yes, I saw the "clear explanation" and I understood it -- but I could not believe that that explanation could possibly applied to spot forex!

My big beef is, the credit you get for being short X / long Y (where X is the lower interest rate currency) is SUBSTANTIALLY less than the debit for being long X / short Y.

This appears to be VERY out of line with industry practices (e.g., EFX giveth what they taketh depending on the direction) and is a serious disadvantage. I would say it makes overnight positions impractical which really limits the value for spot forex.

Leverage with spot forex is not really "financing" like margin to pay for an equity purchase. Treating them the same is a flawed model and not up to market practice. In IB's model, they are treated the same so for example, you can short JPY / long USD and the long USD balance will offset any USD debits from your equity transactions. For that perspective, it seems fair, but that's not how spot forex is typically done... Maybe if IB can fix the model for IDEALPRO with separated forex trading balance, using IDEAL to settle equity, etc. transactions, we can get both worlds?

But using IDEAL to settle foreign equity transactions -- that's nirvana and the primary reason I was attracted to IB. Overall, I'm very very happy with my non-forex experience at IB so far and will move more activity there in short order. But I wish IB will improve the forex rollover interest situation so IB can serve as a viable spot forex platform. I have no issues with the spreads, the commissions, and the like, just with the rollover interest.

Also, I don't recall seeing the 17:00 rollover time anywhere on the site, only in this thread.

 

[pairtracker]

Quote from KS96:

IB should state the interest credited/debited per day
and per currency in the *daily* statements,
so we can all check what is really going on.
I paid too much in interest charges at IB,
and I wasn't able to tell why
or do at least a simple check if that was done correctly....

Also, can someone at IB let us know the *exact* time
that the interest is calculated?
(The answer "between 16:00 and 19:00 ET" isn't satisfactory,
since many of us trade forex at that time.)
This will help to reduce our short positions
in high-yield currencies before that time
so we minimize the charges.

Yes, that will help both sides.

 

[Pippi436]

Quote from rayl:


My big beef is, the credit you get for being short X / long Y (where X is the lower interest rate currency) is SUBSTANTIALLY less than the debit for being long X / short Y.
This appears to be VERY out of line with industry practices (e.g., EFX giveth what they taketh depending on the direction) and is a serious disadvantage. I would say it makes overnight positions impractical which really limits the value for spot forex.

That is the very nature of an interestrate-differential, the both cant be the same (as long as the two currencies have different interest rates). Its no differnet with EFX, i.e. for USD/JPY you recieve 2.73% for longs and you pay 8.66% for shorts (which isnt exactly attractive either).

By the way, this whole interest rate biz(not just fx swaprates) seems quite lucrative for brokers. If you study IBs IPO prospectus, you will find that interest revenues exceed their revenues from brokerage fees. Id really like to know how much interest a broker like EFX reeks in compared to brokerage-fees, they have bad swaprates AND dont pay interest on account balances.

 

[rayl]

Quote from Pippi436:

That is the very nature of an interestrate-differential, the both cant be the same (as long as the two currencies have different interest rates). Its no differnet with EFX, i.e. for USD/JPY you recieve 2.73% for longs and you pay 8.66% for shorts (which isnt exactly attractive either).

By the way, this whole interest rate biz(not just fx swaprates) seems quite lucrative for brokers. If you study IBs IPO prospectus, you will find that interest revenues exceed their revenues from brokerage fees. Id really like to know how much interest a broker like EFX reeks in compared to brokerage-fees, they have bad swaprates AND dont pay interest on account balances.

Sorry, I stand corrected. Indeed IB's rates are better than EFX's.

Where I err was in reading the description vs. checking the math. The description at http://www.efxgroup.com/rollover-premium-rates.html mislead me because I read it too quickly and misparsed:

"""Annual premium rates can be found by adding the "Buy Prem." and "Sell Prem." columns to your Positions or Watchlist windows."""

[The description was not on how to calculate premium rates but how to display them. I checked the math on some recent positions and the spread on rates does stand.]


OK, so now I guess I am sold on IB for spot forex as well. Feeling much better. I retract my criticism.

 

[bjohn]

I know it's off the subject, but can any IB user tell me what kind of slippage I should expect on stop market orders in IB Forex? I trade stocks, but I'm considering opening a EUR/USD position.

 

[Traveler]

Quote from rayl:

Leverage with spot forex is not really "financing" like margin to pay for an equity purchase. Treating them the same is a flawed model and not up to market practice. In IB's model, they are treated the same so for example, you can short JPY / long USD and the long USD balance will offset any USD debits from your equity transactions. For that perspective, it seems fair, but that's not how spot forex is typically done... Maybe if IB can fix the model for IDEALPRO with separated forex trading balance, using IDEAL to settle equity, etc. transactions, we can get both worlds?

I must have this totally wrong then. Isn't spot forex the cash market for currencies? If you buy EUR and sell USD, cash is actually moving in and out of your account and to/from the counter parties? Hence the financing.

This would differ from trading in futures or swaps in which you just have an agreement to pay the difference rather than transferring the notional amount on settlement day.

 

[rayl]

Quote from Traveler:

I must have this totally wrong then. Isn't spot forex the cash market for currencies? If you buy EUR and sell USD, cash is actually moving in and out of your account and to/from the counter parties? Hence the financing.

This would differ from trading in futures or swaps in which you just have an agreement to pay the difference rather than transferring the notional amount on settlement day.

It really is a competitive (or lack of) market practice issue. No one obligates a broker to lend at a higher rate than paid. There are significantly fewer financing risks in forex rollover bec you know exactly what the rollover credit/debit is per day, vs margin lending.

But I stand corrected as to what is the prevalent market practice for retail spot forex trading. That's an admission I already made but will gladly repeat as I'm happy to see that IB *is* competitive with market practice.