Heres an interesting question. since EFP's are so safe, you'd think those T-Bill jockeys that took <3% would have jumped on them Possible not liquid enough on the (early)exit for those guys.,
If IB stops making narrow markets in EFPs, then you could be stuck in them until expiration, if you don't want to pay the mile-wide SSF spreads needed to get out in the absence of IB's market making. IB has no legal duty to continue making markets in EFPs. So the risk that IB will stop making narrow markets in EFPs is one of the risks not presented by T-bills. Another risk is that in a meltdown of the financial system. T-bills will be backed by the full faith and credit of the U.S. government, while EFPs will be backed only by Options Clearing Corporation, which serves as clearinghouse for all options and SSF trading. An extreme scenario might involve default of OCC, even if the U.S. does not default.
I want to contiune the discussion of EFP strategies. I've been thinking if the balance gets too far negative (stocks going up) and you want to cover some EFPs so u dont pay IB any extra interest, you might as well do it on a tuesday. This way, it is like the forex triple interest on a wed. If u have to cover the EFP, by doing it on tue u save the weekend interest. Any comments or insights would be appreciated.
And i want to add that i think EFP doesnt really have a clearing risk because the SSF leg is marked to market, so if one chicago were to go under, and the short SSF leg doesnt get honoured. SInce all the P&L prior to the default is already in ur account, you can just sell the stock right away and incurred no loss.
I disagree. The risk of an OCC default is remote but real. What if the stock market is closed, so that you cannot sell your stock leg? What if the market is open, but there is no bid for your stock? What if your stock has gone to zero? What if the same crisis which led to the OCC default causes the stock market to be closed, or your stock to have no bid, or your stock to have become worthless? These circumstances, combined with an OCC default, could cause you to lose your capital invested in the stock leg. The short SSF is needed in order to hedge against the possibility of loss in the stock leg, and if that hedge fails, you can lose. The bright side is that we are talking about your trading capital. If you are actively trading, then your funds are already exposed to risks considerably greater than that of an OCC default, so that extra risk does not materially increase the risks you are already taking by trading actively. So it makes sense to use EFPs in a trading account. I would think that you should not entrust your entire net worth to EFPs, just as you would not jeopardize your entire net worth by gambling it all on one trade, or the continued viability of one particular broker or bank or other financial institution, or other inappropriate risks. EFPs are not protected by SIPC or FDIC, against loss resulting from an OCC default.
Realisticly, what are the chances of the EFP defaulting? I mean we are getting paid well over 100 basis point better than the 1 month t-bills. EFP's gotta be more dangerous. In a world which AAA rated companies means nothing, is EFP somewhat dangerous? And also, is EFP the only way for a retail guy to lend their money at LIBOR rate? Looking at history, if the banks lend their money at LIBOR rate, how often did it default?
For the people using EFP's to earn interest income on the cash in their accounts, is this EFP income classified as a short-term capital gain instead of interest income?
My guess it is EFP is taxed depending on whether you make money on the futures leg or stock leg. Write off the losses in one leg and taxed in the winning leg. Just my guess.