I'm not currently anywhere close to being liquidated, but how would IB handle a margin violation of a PM portfolio that is mostly long equities, cash, but has a lot of mostly OTM front call ratios on in index options such as the SPX? The obvious way to handle it would be to simply buy back some of the short further OTM SPX calls to reduce the risk. Is that what they would do?
They do some kind of stress test on your portfolio and if they see that you have any possibility of not being able to fulfill your assignment obligation should your options become ITM, they will force liquidate you the day before expiration usually by 4:00 PM EST/EDT but sometimes could be earlier to reduce or eliminate your exposure. They won't wait until assignment to issue margin calls. This is what IB states on their website regarding their liquidation policy: https://www.interactivebrokers.com/en/general/education/pdfnotes/WN-UnderstandingIBMargin.php
No assignment risk here as OP was referring to SPX The question really is the order of liquidation. OP has ratio SPX spreads and a mixture of cash and stocks. Will IB buy in short SPX options, sell stock or remove the SPX ratio spread first if the margin requirement changes? The answer is, there is seems to be no way of knowing what the algorithm will do in my experience. You can set a position to liquidate last, which may or may not work. I want my liquidated position to be reinstated. | IB Knowledge Base (ibkr.info) But if you have multiple stock positions this may or may not work.
I've had a few times where I've flown too close to the sun with IB and held something a bit too close to the close and they auto liquidate some of my positions. Their liquidation order rarely makes sense. In fact their first move often makes the margin situation worse, which leads to this cascading array of subsequent liquidations, leaving you with a disjointed pile of shit to clean up as soon as you can.
This is the main reason I rarely use my IB account. The only time I will trade through them is for the overnight SPX session, which no other broker seems to offer access to.
Is having a sub account for trading, and keep the primary for holdings and hedges, a way around this risk?
I have had a few occasions where IB closed positions in my futures account due to a margin call. They do not officially announce their procedure on how they select which positions they close first et cetera. In my case I noticed that they closed the position with the most negative UPnL (unrealized profit and loss). And then moved on closing positions until the portfolio was within the boundary of the margin requirement. This meant that the last intervention in the chain was a partial closure of a position, i.e. only reduced in size, not completely closed. Nowadays I monitor the "initial margin requirement" compared to the account value. This gives me an early warning and avoids me getting a margin call.
There is still assignment risks it's just that it's settled in cash instead of physical shares. It the OP's positions are cash-secured then obviously there is nothing to worry about since you are not using any margins but if you are using any margins, IB will force liquidate. It doesn't give a shit that you have positions that will cancel each other out. As soon as its stress test shows that you won't have enough money to cover any assignment obligations, they will force liquidate you to reduce or eliminate your positions until they feel you would have enough funds to fulfill the assignment obligations or there are no more assignment obligations to fulfill. Some brokers when they see you have hedging positions that will cancel each other out like in vertical spreads will actually execute the positions simultaneously or the long legs first if it's(they are) also ITM so your account would just cover the net losses or even end up in profit if your long leg(s) is(are) are more profitable but not IB.