Question for traders @ IDEALPRO FX - IB

Re funding of FX positions/ interest charges/ swap points ...

I've tried the forums here & at IB – cudn't get a clear idea about this. I also tried to clarify with IB cust serv but the HK rep didn't get what I was saying or didn't know her subject. I will be asking them again via an a/c mgmt ticket , but it would be good to hear the views of those who already trade FX @ IB

I read that after 17.00 EST IB will do “automatic tom/next rolls for all large (open) positions.” Here i presume 'large' means >= IDEALPRO minimum

I also see the tiers etc & the spreads against the benchmark Int. Rates, per which IB will levy/pay interest. Note that interest is levied/paid only on 'settled cash balances' – ie only from the 'value/settlement date' not the 'trade date' (so even if no auto-roll via tom/next swaps was done, no interest would be paid/rec till settle date)

To specify my main query, let's look at a hypothetical IDEALPRO FX Deal in which, on 5Jun custy buys EUR 1 mio vs. USD at a spot rate of 1.42, for value 9Jun.
[Look at the attached file for the cash flows occuring in the trader's ccy cash a/c s- bold type used for final/closing cash bal in col 6 & 7]

On 8Jun, IB auto rolls the posn., via a tom/next fx swap, so the new settlement is for 10Jun. [in the swap, cust is buying & selling EUR vs USD, to roll the short EUR posn forward by a day.]
'sw-1/2' in col-1 are the o/right FX rates used for the near/far legs of the swap. Assume that spot has dropped to 1.41 on 8Jun at swp time & cash/tom swp is at par so o/right tom rate is 1.41 & used for sw-1 in the tom-/next swap. For simplicity i have assumed custy pays 2 pips on swap. & no brokerage anywhere.

Later, on 8Jun itself, custy closes out his posn by buying EUR @ 1.4050 [spot has dropped 50 pips since the swap] The final balance in the USD a/c shows the net profit of $14,800. This is after a $200 loss from 'paying' on the swap.

My quest. Is does IB charge/pay interest on the 'notional principal amount = NPA' gross flows shown in col. 3 & 4 or the 'net' flows shown in col 6 & 7 – the latter in this case have non-zero values only in the USD a/c.

[Since interest paid/rec is after IB's spreads, for large deals, the difference relative to interbank fx swap points, can be significant. Plus, I'd like to be clear about the mechanics anyway. ]

Logically, any interest paid/rec should be based on balances in col 6 & 7 – since they reflect closing 'net settled cash'. But I'm confused 'cos at various parts of the site & forums IB staff have said things like “If you sell X CHF and buy Y EUR, interest will be debited on the resulting debit CHF settled cash balance and credited on the resulting credit EUR settled cash balance.” This seems to imply the lack of any auto tom/next roll system – since in the latter case only one ccy will throw up non zero balances. [A losing $/Yen trade is also simulated in the file.]

 

At the end of each day (5pm for forex), you have positions (positive or negative) in each currency. For a currency with a positive balance, you will potentially be paid interest. For a currency with a negative balance, you will be charged margin interest.

So, if you buy 1,000,000 Euro with 1,420,000 USD, you will receive interest on the 1,000,000 Euros and be charged margin interest on 1,420,000 USD. It doesn't matter what your unrealized gains/losses are since this has no impact on the # of Euros and # of $ you have in the account. The calculation will be done on the settlement date so a Wednesday trade that is open at 5pm will result in 3 days interest since settlement will be on Friday and a Thursday sale will settle on Monday.

 

Hurricane,

tks for ur reply

i'm still not clear about a few specifics – so let me go back to my example. I will just focus on the leg where custy is paying interest for easier writing [the flip side of custy rec int. Shud be assumed]

btw there is a typo in my 1st post where I say “on 5Jun custy buys EUR 1 mio vs. USD at a spot rate of 1.42, for value 9Jun.” actually i meant sell EUR as that's the eg. In the cashflow table ... so let's say sell EUR. All other details ok.

1. You say.....“The calculation will be done on the settlement date so a Wednesday trade that is open at 5pm will result in 3 days interest since settlement will be on Friday and a Thursday sale will settle on Monday.” Now...in my eg. Trade date is 5Jun, settle date is 9Jun. You seem to be saying that IB will charge int from 5Jun to 9Jun. If that is so, i find it very odd as in OTC FX no exchange of cashflows is occurring till 9Jun! i.e. your EUR a/c is debited [or u borrow EUR] only on 9Jun, so why should you pay int. From 5Jun?
All you will have is M2M varying on your position, for which logically they should calc M2M & earmark that agst your 'free cash' [+ in.mgn ]

in fact, the situation as you seem to be describing it, was what I knew, for many years, to be the IB system for funding FX positions - [tho i knew it then as 'no tom/next swaps to be done, leave ccy a/c cr. / dr. In place, but interest accrues only from 9Jun/ settle date (above eg)].


2. But now I find that they're talking about “automatic tom/next rollovers” on their site.

My main point is that if you do these “automatic tom/next rollovers' then, as I show in the cashflows, at least one of the ccy cashflows gets zeroed/cancelled out. In fact, one would set the amount (& if possible the base ccy) on the swap , so as to cancel out the projected short ccy posn on the 1st settle date (& all future settle dates till the posn is closed out).
In practice any FX desk would like to avoid paying penal interest on nostro debit Balances.

& in the a/c of the ccy with the non-zero balance, all you will accumulate steadily is the profit/loss that your posn is accruing +/- what you pay/rec on the fx swaps. & of course interest shuld accrue on these bals. But these bals. Will be very small relative to the deal size. (This forced gradual 'realisation' of the p&l as recorded in the the ccy a/c, is inevitable 'cos most int.bnk c-partys will insist on market rates for fx swaps.)

So I'm quite perplexed as I don't seem to understand exactly how IB is rolling over the custys posns & if i do, it doesn't seem to make sense to me. Yet many large traders are happily trading at IDEALPRO (btw i too have been happily trdg US stocks @ IB – TWS ; 8 years now) so I must be missing something !

 

I was providing a general response and hadn't considered the specific dates in your example. My point is, look at the cash flow from your purchase based on the settlement date. If you opened your position on Friday, June 5, it will settle on Tuesday, June 9. You will not see any interest earned/charged to your account until Wednesday, June 10. The interest will stop only when the settlement date for your position closing has been reached. Also, changes in the exchange rate between your trade open and close have absolutely nothing to do with the interest calculation. If you own 1 million Euro, you will receive interest in Euros at the set rate without regard to whether the EUR.USD exchange rate has gone up or down. (It will, however, affect the restatement of this interest back into USD.)

I don't understand what you're saying about rollover for forex at all. You buy it, you own it. Whether that's for a minute, a day, a week, a month, etc. The purchased currency is in your account until to sell it.

 

I suspect you will find many of those forex traders using interactive brokers IDEALPRO are day traders.

Their overnight financing costs are rather expensive compared to traditional swaps.

 

Hurric+ Graham , tks for clarifying ....

now its a little clearer – yes the schema that Hurric. has described, - is one legitimate way to treat these deals & the interest accruals – as i said, “the situation as you seem to be describing it, was what I knew, for many years, to be the IB system for funding FX positions”
while this is a legitimate sys. It's not the most efficient method, as traders are hit on both borrow/lend side by IB's spread agst rate benchmrks [all broker's charge this, so ntg agst IB – I'm a 99% happy IB cust]

Enter 'tom/nxt swps'....

see

http://www.interactivebrokers.com/en/trading/pdfhighlights/PDF-Forex.php?ib_entity=llc

next to the trophy pic, note the mention of “Auto-roll: automatic overnight position rolls (tom/next swaps) for large positions. There is no commission or other charge for this service. As with our spot dealing, roll prices are direct best quotes from our interbank partners.”

[Graham, when was the last time you held an o/n pson @ IB ? – 'cos they seem to be suggesting that
they will actually roll you at market rates on fx swaps. ]

now this is why I'm confused. If you do these rolls (see below), then this is a substantive change from the earlier system - & Hurric's impression should at least be partially incorrect. (not trying to offend, just drawing rigid inferences)

I'll explain ..

“rollover for forex” is done via FX swaps (which are diffn from Cap. Mkt. Swaps like IRS, basis swaps etc) – i've explained in 2. of my PP, some of the mechanics & aims of doing FX swaps. There is a liquid (if anything is liquid anymore!) mkt in FX swaps in the short dates most intbnk FX desks will be heavy users as they strive to avoid large nostro debits.

In an FX swp, each c'party will sell/buy ccy1 for near date/far date (& also on the flip side - buy/sell /ccy2 for near date/far date – where your original FX o/right posn (this example) is Long ccy1.
The net result of the fx swap is to maintain your exact original FX o/right posn – but with a new effective settlement date = far date in swap.
You can see the cashflows in the attached table in the OP.

So if you call the older method = M1 & the new method of “Auto-roll: automatic overnight position rolls (tom/next swaps) = M2
well if they're using M2 now, then M1 will basically end up getting applied to miniscule net balances (see my table) relative to the deal size, & Graham will be happy too ! (as roll costs will tend towards mkt rates)

Btw i posted a ticket via my IB a/c on 8Jun & found it hasn't even been assigned to anyone yet. Found they're exp. High query volume – will post here if+ when i get some clarity from their side.
Given the general depth & quality of IB's info though, I'm quite surprised they haven't posted any detailed cashflow examples of spot FX deals held for several days.

 

So Hurric. - just to sum up re your ....”I don't understand what you're saying about rollover for forex at all. You buy it, you own it. Whether that's for a minute, a day, a week, a month, etc. The purchased currency is in your account until to sell it. “

yes your point is true wrt the o.r FX posn – but what I'm saying is that fx swaps offer a more efficient way to manage the cashflows – rather than just leave the original dr. cr. Balances intact
(ie u do have options other than the latter method)

they're more efficient 'cos fx swap prices will track the interest rate difference [covered interest parity principle] for the relevant period - & thus traders can avoid paying the brokers borrow / lend spread relative to bnchmrk 'i' rates

in the older method = M1, you get hit with both – 1. the interest rate difference & 2. the brokers borrow / lend spread relative to bnchmrk 'i' rates

of course that doesnt mean any broker has to use a more efficient method – but now IB seems to be saying that they do use FX swaps . - tho some hlpdsk staff are still singing the old song!

 

Jackass: i have no experience in the swap market. Is it possible to trade odd amounts - for example a swap for 37K eur/usd position? Is there an active market for such tiny and odd amounts that are tradeable on IB IdealPro? I would guess no - but like i said, i have next to no knowledge about this market.

I am under the impression that the usual borrow/lending rates published on their website apply for f/x positions/balances, including the ib procedures (no interest for the first 10K, then tiered according to amount).

 

Pippi

[here old system = M1 , refers to what Hurric mentioned & what u describe in para 2 of your p. post]

no u wudnt ORDINARILY get intbnk fx swap pxs fr those amounts – the minimums wud be $1 mio eqv. (unless its a correspondent bnk reln.) - but what I suspect may be happening at IB in the new system=M1, is an 'aggregation + txfr pricing system ' - that gives u access to mkt fx swap rates anyway
and u wudnt need to trade the swap to get these as IB is auto-rolling

let's look at a scenario .......deal dt 5Jun, val 9Jun

since IB will have many custy with posns – after the close on 5Jun, they check for each Liq. Prov. , What is the net [of all custy deals] proje. ccy posns . For settle 9Jun.

Early on 8Jun, they do TOM / NEXT [ this means near leg = 9Jun, far leg = 10Jun – assuming no hola in any ccy] fx swaps [buy/ sell or sell/buy as needed] to basically nearly zero out all their non USD a/c s [Since their base is USD]with that Liq. Prov. , for val 9Jun. Now all 9Jun non USD flows have been moved to 10Jun.
This is one possible 'clean' way to manage the cash book – i,e, just fund directly via loans & depos in the base ccy only.

They also register all the rates both side fx swap quotes for all ccy - for their database

then based on your posn – say ur Long 37K EUR short USD – that means u wud have had to sell & buy EUR to push fwd ur cash posn, - they will find the appropriate rate (pips) from their database. & apply it to your posn & +/- the $ swap p&l from ur a/c val 10jun
note IB charges no fees/spread for this service

of course as custy we are not bothered with how Timber Hill 'aggregates '& manages their ccy cashflows – as long as the 'txfer pricing' part is , in substance, similar to what I've outlined – then you shud be able to get mkt fx swap rates for non mktable amounts !!

for indic FX swp points see

http://netdania.com/Products/live-s...eign-exchange/real-time-quotes/QuoteList.aspx

click the USD Forwards tab.