IB Exposure Fee

M

mastacoli71

Friend of mine with fairly large acct that often shorts OTM long and short term options received notification today from IB of a daily exposure fee based on certain magnitude of "Exposure Analysis". I find it kind of odd given the reputation of IB and their risk controls. Maybe this is just a new way of controlling risk but why not just increase margin requirement to prevent blow ups on certain positions?

Pure speculation on my part but did they uncover a turd behind the scenes? Are they anticipating tail risk event in near future and feel large accounts are over exposed in one direction? Again, just find the timing of announcing such a measure odd in nature.
 
Interestingly enough, and just as unfortunate, I read this thread a few days ago and had absolutely no knowledge this calculation and corresponding fee existed.

To my surprise, very early this morning I got a message from IB about the “Notice of Exposure Fee” with regards to my positions.

They are giving me until June 13 before the fee kicks in, I would love to see the exact calculation they are using – which of course they don’t provide. It’s not like its intellectual property, right?

I’m thinking (and kind of hoping) they are also taking into consideration a futures expiry, which currently acts as hedge in my account of short options. They expire June 12, which obviously, I would be rolling over to the September contract. This makes some sense, since they are telling me the fee would kick in the day after, and the IB risk department sees this as, well, a risk since they don’t know that I would actually do it.

Perhaps I will roll the futures over early next week to see if this makes it disappear. If not, an annoying fee that eats away profits, don’t protect me at all, though probably protects IB in some fashion.

Here is the email content, I’m sure most have never seen it, nor will ever (which is good);

Subject: Notice of Exposure Fee

Charges to Accounts with Very High Worst-Case Loss Exposure

As part of its risk management policy, IB continually simulates worst-case profit-loss scenarios for client portfolios. The scenarios examined may exceed the parameters used by various exchanges for determination of minimum margin requirements.

According to our analysis, it appears your account [account number removed] would have a maximum loss of [number removed] as compared to your margin requirement of [number removed] and your available capital [number removed] (all balances in CAD).

IB will charge for this excessive risk using an approach familiar to purchasers of insurance , i.e the charging of a premium to offset future event risk. More information is available here. We calculate this account would have a daily exposure premium of [number removed] CAD per day

Please note that this premium is not being actually charged at this time. However, we are displaying the anticipated charge to alert you ahead of the expected implementation on June 13, 2014, whereupon the exposure charge will actually be debited from your available funds on a daily basis.

Exposure charges can be eliminated by a combination of the following:
• Adding additional capital to your account.
• Reducing the exposure by repurchasing short positions in options. We have found that short positions in cheap options generate the largest exposures relative to capital. You can use the Risk Navigator to simulate the effects of changes in your portfolio.

Again, the amount above is not being charged at this time. To avoid charges for carrying positions that have a loss far greater in the worst case than the capital of your account, we urge you to examine ways to reduce your exposure prior to the implementation date for this algorithm.

Interactive Brokers Customer Service
More...
 
I’m going to kind of answer my own question – “I would love to see the exact calculation they are using – which of course they don’t provide.”

The dollar value of the calculated maximum loss is identical to my -30% underlying move projected loss under yesterday’s stress test report. I’m currently negative delta, all things (future and short options) considered, so the warning is purely for tail risk, I have a fair number of short deep OTM PUT options expiring both next week and in July.

This is helpful, at least I now know exactly what the issue is (and some credit to IB, they did mention this generically in the email). However, the nuts and bolts of the calculation remain a mystery.

I have to believe the fee is “activated” when one of (or theoretically both) -30 and +30% values under the stress test fall above a certain multiple of account net liquation value. It would be nice to know this; it would allow traders to be more proactive.

As for the calculation of the actual fee, I probably won’t be able to figure that one out myself. However, as long as they give me time to adjust the portfolio (one week is good from the begging of any initial notice period) to get back into compliance I see this as acceptable. Also, the fee that is/was going to be debited from my account daily, although annoying (and arguably unfair), was only 0.98% annualized of the current net liquidation value.

That is recoverable, so IB, you still have my love.
 
Etrade doesn't charge such a fee.
And they don't real-time liquidate.

But you don't get all the fancy tools that IB provides and the commissions are slightly higher.
 
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