This post concerns Interactive Broker’s Exposure Fee as it applies to clients holding positions in equity index futures … eg. E Mini S&P, EURO STOXX 50, DAX etc.
When I first read about their Exposure Fee last year sometime, IB said that …
By way of background, I’ve been trading futures on a daily basis for 25 odd years and have been an active IB client holding several accounts via different entities since 2004, so I really didn’t think this would apply to me as I have a reasonable grasp on what constitutes sound risk management, and thought it would only be applicable to some neophyte option writers, so was probably a good thing.
However shortly thereafter I noticed that I was occasionally being charged this Exposure fee, but I didn’t pay much attention as compared to the account size it was a fairly insignificant charge. But soon it was being charged every day and to more than just one account. While the daily amount was small, it was then starting to reach several thousand dollars per year.
From IB’s website I couldn’t figure out how it was calculated or for that matter why it was being charged at all, so I made contact with customer support, only to be told that …
For those unfamiliar, the 21 I FUT 20190916 ICEEU relates to the EURIBOR contract which has been trading on LIFFE since 1994 and the largest one-day drop over the last 20 odd years has been 0.3%, so to stress test using a 30% fall is clearly entirely inappropriate ... in fact it’s totally ridiculous. Anyway long story short after many more messages the IB rep apologized and said that the fee had nothing to do with money market positions but was in fact based on my long stock index positions!
So here’s how it works … they tally up all of your equity index positions and calculate the value of a 30% drop in price, which they define as “potential exposure”. If this potential exposure (less $76,000, don’t ask) is higher than the account’s total net liquidation value then an exposure fee is charged on a daily basis.
To clarify here’s a simple example. Let’s say your account has only one position. You are long 100 E Mini S&P contracts. At a price of 2200, a 30% drop would equal a loss of $3,300,000, so to avoid exposure fees you would need to maintain this amount of cash in your account.
Now here’s the kicker … that equates to almost 5 times the amount of initial overnight margin. WTF!!
I don’t know about you guys but I’ve never been a big fan of holding excess cash in broker accounts, think MF Global. So to me this is a huge impost on continuing to trade with IB.
But wait, there’s more. IB is at great pains to say that …
and …
But this is total BS because the Exposure fee is calculated only for the following products
So IMHO it’s clearly obvious that IB’s “effort to increase client awareness as to their potential exposure” is a miserable failure. Putting aside the fact that they choose to apply one number – 30%, to all assets regardless of historical volatility, why on earth would they apply what they call “stress testing” solely to equity indices and a few energy products. What does this imply … that IB thinks there is no risk associated with Currencies, Bonds, Agricultural products, Metals, Natural Gas etc etc … or is it all simply too hard so let’s just use a naïve 30% move measure to a couple of sectors and ignore the rest of the portfolio. Further not taking into account that the remainder of the client’s portfolio may contain assets that have some degree of negative correlation with equities thereby reducing risk levels.
While I appreciate that IB have every right to charge clients whatever they wish, it’s pretty clear that genuine risk management is not at all high on their priorities. This approach is neither a “conservative approach to risk” nor does it “attempt to protect the capital of the firm and its customers from the risky trading of a few, consistent with applicable regulatory rules”. It’s perfectly obvious that what IB are describing as risk management is nothing more than a blatant effort to gather more fees.
In recent times about 80% of my futures trading has been via IB, however as a result of this Exposure Fee I’ve started to allocate more of my equity and energy trading elsewhere. So my purpose in posting here is simply that I haven’t noticed much discussion on ET about this, nor have I encountered this type of thing with other brokers so would appreciate any thoughts ET members may have.
Do you agree that a policy requiring clients trading futures to fund their account with 5 times the amount of initial overnight margin, otherwise they will be subject to daily exposure fees, is simply a rort?
When I first read about their Exposure Fee last year sometime, IB said that …
Interactive Brokers imposes a daily "Exposure Fee" on a small minority of IB customer accounts that have a very high worst-case loss risk exposure (for example, accounts with high exposure to short option positions).
By way of background, I’ve been trading futures on a daily basis for 25 odd years and have been an active IB client holding several accounts via different entities since 2004, so I really didn’t think this would apply to me as I have a reasonable grasp on what constitutes sound risk management, and thought it would only be applicable to some neophyte option writers, so was probably a good thing.
However shortly thereafter I noticed that I was occasionally being charged this Exposure fee, but I didn’t pay much attention as compared to the account size it was a fairly insignificant charge. But soon it was being charged every day and to more than just one account. While the daily amount was small, it was then starting to reach several thousand dollars per year.
From IB’s website I couldn’t figure out how it was calculated or for that matter why it was being charged at all, so I made contact with customer support, only to be told that …
Currently, the Exposure Fee for account UXXXXXXX is being assessed based on your Money Market positions, specifically the 21 I FUT 20190916 ICEEU. A 30% drop in value for this product results in a projected loss of $1,670,084.32 for this position alone, -1,948,188.37 for the full portfolio.
For those unfamiliar, the 21 I FUT 20190916 ICEEU relates to the EURIBOR contract which has been trading on LIFFE since 1994 and the largest one-day drop over the last 20 odd years has been 0.3%, so to stress test using a 30% fall is clearly entirely inappropriate ... in fact it’s totally ridiculous. Anyway long story short after many more messages the IB rep apologized and said that the fee had nothing to do with money market positions but was in fact based on my long stock index positions!
So here’s how it works … they tally up all of your equity index positions and calculate the value of a 30% drop in price, which they define as “potential exposure”. If this potential exposure (less $76,000, don’t ask) is higher than the account’s total net liquidation value then an exposure fee is charged on a daily basis.
To clarify here’s a simple example. Let’s say your account has only one position. You are long 100 E Mini S&P contracts. At a price of 2200, a 30% drop would equal a loss of $3,300,000, so to avoid exposure fees you would need to maintain this amount of cash in your account.
Now here’s the kicker … that equates to almost 5 times the amount of initial overnight margin. WTF!!
I don’t know about you guys but I’ve never been a big fan of holding excess cash in broker accounts, think MF Global. So to me this is a huge impost on continuing to trade with IB.
But wait, there’s more. IB is at great pains to say that …
This is to attempt to partially protect IB and its customers from those accounts that have very risky positions that currently satisfy exchange margin requirements, but nonetheless could suffer excessive losses in the event of a significant market move
and …
Each day, as part of its risk management policy, IB simulates profit-loss scenarios for client portfolios based on hypothetical market movements of certain magnitudes ("Exposure Analysis").
But this is total BS because the Exposure fee is calculated only for the following products
· Equity with coordinated volatility change
· Crude Oil and Refined Oil
· Volatility
· Crude Oil and Refined Oil
· Volatility
So IMHO it’s clearly obvious that IB’s “effort to increase client awareness as to their potential exposure” is a miserable failure. Putting aside the fact that they choose to apply one number – 30%, to all assets regardless of historical volatility, why on earth would they apply what they call “stress testing” solely to equity indices and a few energy products. What does this imply … that IB thinks there is no risk associated with Currencies, Bonds, Agricultural products, Metals, Natural Gas etc etc … or is it all simply too hard so let’s just use a naïve 30% move measure to a couple of sectors and ignore the rest of the portfolio. Further not taking into account that the remainder of the client’s portfolio may contain assets that have some degree of negative correlation with equities thereby reducing risk levels.
While I appreciate that IB have every right to charge clients whatever they wish, it’s pretty clear that genuine risk management is not at all high on their priorities. This approach is neither a “conservative approach to risk” nor does it “attempt to protect the capital of the firm and its customers from the risky trading of a few, consistent with applicable regulatory rules”. It’s perfectly obvious that what IB are describing as risk management is nothing more than a blatant effort to gather more fees.
In recent times about 80% of my futures trading has been via IB, however as a result of this Exposure Fee I’ve started to allocate more of my equity and energy trading elsewhere. So my purpose in posting here is simply that I haven’t noticed much discussion on ET about this, nor have I encountered this type of thing with other brokers so would appreciate any thoughts ET members may have.
Do you agree that a policy requiring clients trading futures to fund their account with 5 times the amount of initial overnight margin, otherwise they will be subject to daily exposure fees, is simply a rort?
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