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 … 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 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?
As a fellow IB customer who trades the E-mini with IB, this is unsettling. I've been trading futures with an IB account since only May of 2016, but I haven't noticed this charge yet.
I would be tempted to say .... There are two sides to every story, and we don't even know the full context of your side, so its a bit much to ask a bunch of random people whether they think something is fair or not based upon limited facts. Secondly. You're trading with leverage. This means you're playing with the house's money. They have every right to put in place controls that they see fit. Don't like it ? Go elsewhere.
I trade and often hold overnight dozens of millions of usd equivalent notional exposure in various fx positions, both long and short. I was never once charged exposure feeds. I can't speak for other asset classes as I only trade currencies with IB but for spot fx this does not seem to apply to my account. Often times my leveraged exposure stands to be 5 or 7 to 1 so I clearly trade leveraged positions. Yet no exposure fee. But I am all for full exposure and more transparency and I welcome an open discussion to shine more light on this exposure fee. But let's keep it fair and let's stick to facts. Not saying you did not provide facts re your account but i also provided facts re my account so the devil seems to lie in some other details that you have not yet drilled down upon. A broad generalization does not seem to apply here.
It sure is the way I understood their exposure fee, although I'd missed the 76000$ rebate. received notices that an exposure fee would start beeing charged from about 1 week later a couple of times from IB and it appeared keeping 30% margin was the requirement to avoid it. Not a fan either, but it's not the only margin related issue that bugs me with IB (100% requirement on lots of stocks hurts sometimes as well). Still keeping IB for active trading anyway, can't say i found an alternative so far, or that the possible alternative has accepted my account when I applied there (ABN Amro and Newedge).
I've been surprised by the Exposure Fee InteractiveBrokers imposes but found that it is often a very small percentage of the possible gain and that their margin requirements are less subjective and more reasonable than that which exists at other reputable brokers.
This was very typical of all my interactions with these clowns before I left. First their customer service tells you something that is just point blank, 100% wrong. They suffer no consequence for this. Then, in my experience they defend this just obviously silly incorrect statement long past any semblance of reasonableness. They they pull some BS about how they're just being prudent about risk, when they clearly don't even have the first concept of risk. If you look at other threads I've posted here the IB rep chastises me about my criticism of one of their alleged "risk" policies that I pointed out was trivial to go around. They then ended the argument with something about how I didn't know their "secret" procedures to prevent that from happening, which clearly they don't either because I was able in practice to easily circumvent their idiotic "risk" policy. This is a company staffed by morons of the highest order. They clearly spend as little money as possible on hiring and could give two craps about what customers think of their customer service, depending on you sticking with them because of their offering and pricing. When you take the time to look around, taking into account what you're actually trading, in my experience you're always able to find a reputable firm with a lower price point and decent, competent humans to help you. It's beyond me why anyone would stay with these fools after having any interaction with that joke they call "customer service" and running into one of the many idiotic policies they have, i.e. charging margin on a debit spread, charging more margin than it's possible to lose on a credit spread, auto liquidations galore, holding orders inside the spread because they in their infinite wisdom think the spread is too large....the list goes on and on. Just look around, you can certainly find a better provider than these guys at a lower or equivalent price.
There's a lot on this. And the issues you state aren't the only ones. See https://www.elitetrader.com/et/threads/ib-exposure-fee.284323/ IB is no place for a futures trader; hasn't been for years now.