IB is going to start charging a daily exposure fee

Hi all!
Last November 4 I received this e-mail from IB:

Exposure Fee For High Risk Accounts - Important Update

Last month, Interactive Brokers announced that our exposure fee calculations would start to consider volatility-based products (e.g. VIX, VIXX, VIXY, XIV, etc.) and changes to the implied volatility factor for options. On October 2, 2015, a decision was made to temporarily revert to the previous calculation, which included neither volatility-based products nor changes to the implied volatility factor for options.

Effective with positions at the end of day on November 6, 2015, Interactive Brokers will theoretically re-value both equity and volatility-based products, utilizing both price and volatility shifts. If an uncovered loss exists, and if that loss is at least 76,000 (USD) greater than an account's then-current Net Liquidating Equity, the uncovered portion will be assessed a fee to be charged the following day.

Please note, prior to November 6, 2015, Interactive Brokers will still calculate and charge accounts an exposure fee based on price risk (Non-Coordinated) only. Accounts will have the ability to view exposure based on Coordinated and Non-Coordinated risk within Risk Navigator check exposure fee feature.

Accounts seeking to minimize the effect of the new risk scenarios 'exposure, and/or to avoid this fee in its entirety, may do so by identifying the source of the exposure by using the Risk Navigator application within TWS. The 'My Portfolio' Risk Navigator will allow a user to view exposure in real time, while the 'What-if' Risk Navigator allows users to view the projected exposure based on "what-if" position changes. Account holders are encouraged to consider these changes beforehand and take the necessary actions to reduce exposure through position adjustments and/or collateral increases. For additional information regarding this fee with information regarding how to monitor and manage it, please refer to the website and KB2275


Regards,

Interactive Brokers Client Services


So from November 6, 2015, my portfolio suffered a sharp increase of the exposure fee.


I have in the portfolio short nikkei put options with strike put 4000 4500 5000 (expiration 10 december 2015) that are far more than 75% from the value of the nikkei index (19,700).
I have also short call options on crude light that with the parameter + 60% in the stress test results in an high exposure fee

I exposed this problem by chat and I asked him the exact calculation of the exposure fee and I asked for a refund but this is the reply: "The formula is proprietary, I don't have it to offer" "and for options like ES and N225 futures we also use vol up 300% This was rolled out about a week ago" "You have a customer agreement with the firm And our management instituted the fee. I understand you don't like the fee. But it will be charged if you want to keep these positions."


It is regular this behavior? It complies with the regulations? They can make a sudden and large increase in the exposure fee without saying how is it calculated?

A trader suggested me to open a complaint here http://www.finra.org/investors/investor-contacts

What do you think? Do you have more suggestions?

Thank you in advance
 

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It seems like people are getting warning emails about the fee all over the place. It seems like the letter gets sent once a client goes over the limit and they give you a week of grace period to adjust.

I rolled over some contracts a day early that were close to expiring but didn't close them out. They expired worthless by the expiry date anyway. But I got an email too. Even though my leverage ratio was still well below 0.5 at the time and when the contracts expired worthless the leverage goes even lower and I will no longer have the exposure fee.

So policy wise, they don't charge the exposure fee for a week from the date of the warning in general.

I'm wondering, if your exposure drops off before the 'charge' deadline, and you later go over again, will they charge you right away? Or will they give you a week grace period again?
 
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fbell50 said:
I've done some what if testing with the risk navigator. I have a large short position in UVXY which is a 3x etf of the vix. While the vix is a measure of volatility, there is a strong negative correlation to the market as a whole. The market goes up, vix/UVXY goes down and vice-versa. I am also about 90% long. My short UVXY is about 16%. So I am effectively about 106% long. My true short position is negligible.

Performing a what if analysis in IB's risk navigator I removed my long positions one by one and as I did my exposure fee steadily grew to almost 5x its original value.

Their algorithm is treating UVXY as if it is positively correlated with the market. This is clearly a major flaw. I would also argue that charging an exposure fee with nothing but a 16% short UVXY position is a flaw.
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To be fair, correlations can be broken especially with a malfunctioning market. I can understand why they'd just mark it all with a worst case instead of looking at correlation. Say you are long DUST and long NUGT, obviously both go opposite directions but their algos might price both -30% against you together, which doesn't or shouldn't happen. But it can. They are still a separate instrument trading separately and if there is lack of liquidity or the market is broken or there is a blackswan with the issuer, maybe its possible..
 
beefcaketrade said:
To be fair, correlations can be broken especially with a malfunctioning market. I can understand why they'd just mark it all with a worst case instead of looking at correlation. Say you are long DUST and long NUGT, obviously both go opposite directions but their algos might price both -30% against you together, which doesn't or shouldn't happen. But it can. They are still a separate instrument trading separately and if there is lack of liquidity or the market is broken or there is a blackswan with the issuer, maybe its possible..
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To whom all concerned about IB's margin risk fee:
Don't see many discuss on this topic on web, and this thread has the most thoughtful discussion so far though there is no post for the whole 2016.

I raised 3 simple questions to IB about a month ago, and IB is not willing to give me answers so far.
1, is it legal for IB to charge me such risk fee?
2, is IB's risk algorithm for PM legal?
3, does IB sell me insurance policy with the risk fee as premium?

I believe many people are charged by IB for the risk fee, and IB is more and more relying on the fee as another source of revenue to bolster its stock price, and becomes more and more aggressive. Wonder if anyone want to work with me to start a class action against IB for this. I truly believe the risk fee charged by IB is illegal. It's basically like a landlord charging its tenants a risk fee because he/she may cause fire on the building and result damage and loss to landlord and other tenants living in the same building. Ridiculous!
 
I am not at all affiliated with IB (other than using them as my broker), but I can answer your 3 questions for you quite easily.

1. Yes
2. Yes
3. No
 
Ryan81 said:
I am not at all affiliated with IB (other than using them as my broker), but I can answer your 3 questions for you quite easily.

1. Yes
2. Yes
3. No
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Hey, you are not IB, and doesn't bear any legal responsibility for the answers, so you can give out your answer quickly. IB could NOT give me the answers for over a month. If it's easy to answer, IB definitely closed the ticket with the answers weeks ago. I truly believe there is something illegal under the cover for this risk fee.
 
1.) Yes
2.) Yes
3.) No

I don't think you have a case. You agreed to the terms to keep your account.

Although I don't think this "exposure fee" invention is the best way to go about influencing behavior on their part. I think they should have just wrapped it around increasing margin requirement instead. The old fashioned way. This 'exposure fee' invention reminds me of "gov over regulation". Just adding another layer on top, where the existing system already has a mechanism in place to do what they want to. In this case, they want to discourage 'risky' positions. Well, they can already do that by simply playing with (i.e. increasing) the 'maintenance margin' requirement on "risky" positions. But no, instead they keep margins the same and make an invention called 'exposure fee'.

Out of curiosity, how much are you paying per day in exposure fee right now?
 
beefcaketrade said:
This 'exposure fee' invention reminds me of "gov over regulation". Just adding another layer on top, where the existing system already has a mechanism in place to do what they want to. In this case, they want to discourage 'risky' positions. Well, they can already do that by simply playing with (i.e. increasing) the 'maintenance margin' requirement on "risky" positions. But no, instead they keep margins the same and make an invention called 'exposure fee'.
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The sole reason IB does it this way (i.e., utilizing a made-up "exposure" fee) is to obfuscate their true cost structure. And that's bad; very bad.
 
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