Almost funny The peculiarities of portfolio margin accounts are at the heart of a newly launched lawsuit against electronic trading firm Interactive Brokers LLC. The class action complaint was filed by two clients of the broker – Timothy Moss and Heather Hauptman, with the New York Southern District Court today. The document, seen by FinanceFeeds, accuses the broker of unlawful management of a number of portfolio margin accounts. The plaintiffs explain that “portfolio margin” generally allows for the use of higher leverage than standard “strategy-based” margin lending (commonly referred to as “Regulation T” margin lending). The United States Securities and Exchange Commission (SEC) and the regulatory predecessor to the Financial Industry Regulatory Authority (FINRA) amended FINRA Rule 4210 in 2007 to allow, for certain types of securities, portfolio margin trading in retail customer accounts. Rule 4210(g) provides that broker-dealers may use portfolio margin to calculate margin requirements using a “risk-based” model. However, this is allowed only in relation to specifically enumerated security types, such as equity-based securities, and derivatives on eligible equity securities — like options or warrants on equities. According to the plaintiffs, Interactive Brokers disregarded this rule in administering its customers’ Portfolio Margin Accounts. Instead, the broker provided portfolio margin treatment for Exchange Traded Notes (ETNs), such as the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN, traded under the symbol VXX. The plaintiffs argue that ETNs, and the VXX in particular, are not equities or (derivatives of equities), but instead are unsecured debt instruments. As unsecured debt instruments, ETNs – like the VXX – are not among the approved list of investment products eligible for portfolio margin. Interactive Brokers is said to have been informed by both FINRA regulators and the Options Clearing Corporation that unsecured debt instruments such as the VXX are ineligible for portfolio margin and risk-based margining treatment. For instance, in an email to David Battan, General Counsel and Executive Vice President of Interactive Brokers, Steve Yannolo from FINRA Credit Regulation stated: “it was recently brought to our attention that the OCC is providing P/L for ETNs. Since these are debt instruments, they are ineligible for portfolio margin.” The plaintiffs allege that by continuing to provide portfolio margin’s risk-based margining treatment for open positions in ETNs and options on ETNs – such as the VXX – the broker violated FINRA rules and breached its contractual agreements with its customers. The plaintiffs – Mr Moss and Ms Hauptman, engaged the services of a financial advisory firm, Meridian Capital Advisors, LLC and provided the firm with discretionary authority over their investments. Their accounts with IB account included VXX positions and IB was improperly applying Portfolio Margin treatment to their VXX positions. As of the end of day on August 21, 2015, the total value in Ms. Hauptman’s Portfolio Margin Account was in excess of $200,000. At the end of the day on August 21, 2015, Mr. Moss’ account was valued at approximately $186,000. Over the weekend after August 21, 2015, events unfolding in the Asian markets led to a drop in US stock futures. At around 12:00 AM on the morning of August 24, 2015, Interactive Brokers changed the margin requirements, increasing the margin requirement for the VXX and VXX option positions for all of its clients, including the plaintiffs. When the market opened on August 24, 2015, the Dow index dropped 1,000 points and the price of the VXX spiked. As a result, the value of plaintiffs’ Portfolio Margin Accounts (and those of all similarly situated IB customers) dropped. Also, because the broker had increased the Portfolio Margin requirements, many customers were put into a margin deficiency situation. In the month of August, Ms. Hauptman’s account lost over $175,000, primarily as a result of the VXX and VXX option trades that occurred using Portfolio Margin leverage. Likewise, in the month of August, Mr Moss lost around $150,000, with most of the losses due to VXX and VXX option trades that occurred using portfolio margin leverage. Plaintiffs propose the following Class definition: All persons who held a Portfolio Margin Account with Interactive Brokers, LLC, containing a position or option in an ETN at any point from December 1, 2011 through the date of judgment, and whose ETN positions received Portfolio Margin treatment. They accuse Interactive Brokers of, inter alia, Breach of Contract, Unjust Enrichment, and Breach of the Implied Covenant of Good Faith and Fair Dealing. The Plaintiffs seek injunctive and declaratory relief on behalf of themselves and all Class members, as well as damages in their individual capacity. The case is captioned Hauptman et al v. Interactive Brokers, LLC (1:17-cv-09382).
lol. Charged under the Restraint of Gambling act 1934. I can see where changing the rules in the middle of the game might be called unfair.
How the hell is IB's behavior legal or ethical (by financial industry standards)? Can somebody here make an argument for arbitrary margin changes without notice? Or autoliquidation at terrible prices when the market is under duress? I understand that it's their business but my god...
That's pathetic - No doubt they would not have complained had they made a nice profit. Brokers would be wise to blacklist these dim wits. We all know that only the richest banksters and 1%ers like Trump get bailed out from risky bets that go bad.
This seems predatory. Risk management could have had a phone call with these clients and told them to pare down their positions before a crisis or buy some otm options to cap off their risk. Who took the other side of the trade when these clients were liquidated? What price did they get? Mid market? We know this story. And I'm guessing a bunch of guys will excoriate these reckless traders. I get that. But IB is no innocent angel either... To each their own. If you're happy with IB, awesome. This kind of punitive "risk management" just makes me nervous. Again, to each their own.
It's written over and over again in the disclaimers brokers make customer's sign off on that margin calls are not subject to a phone call prior to liquidating positions that they deem as to risky, the can knock you out whenever & however they want when your nearing their dynamic red-line. People that use leverage are pretty darn naive to not get that whoever you borrow $ makes the rules. The best antidote is to not trade on the over leveraged red line, most seasoned traders maintain an adequate surplus of cash - so as not to be in harms way of a margin call, we call it risk mgmt. Of course the VIX volatility can spike, & of course IB has a well known reputation of fast & furious auto liquidations.
Fair enough. That's IB's policy. However, this doesn't apply across the board to every brokerage firm. I never put on naked option positions for this reason, especially in vxx. Reckless traders collide with draconian risk management in this case. It's like rubbernecking at an accident on the highway.