The definition is: "This is the amount by which the adjusted net capital exceeds the net capital requirement." Why the excess capital is important for us as customers? :eek:
It depends on the firm. At IB they automatically pay interest on your cash balance. They now pay the "Fed Funds Effective Rate" less .5%. Until yesterday they were paying LIBOR less .5% So using the LIBOR rate for your initial capital they'd pay 5.15% on $140K. IB does not pay anything on the first $10K of your $150K. Thus, the effective rate would be about 4.8%. Few retail firms pay this much. Some sweep your credit balance into money market funds. Very few pay any kind of decent interest. Trade Station, for example, pays 1.25% on amounts over $10K and I'm not certain they have a "universal account" as they use an outside clearing firm for futures (RJ O'Brien). Jack
If other customers have large trading losses, in excess of their account equity, the broker is responsible for making up the deficit, so that counterparties to the losing trades will receive the gains to which they are entitled. The broker must do this out of its capital. If that capital is exhausted, because it is too small to cover the customer trading losses, then the accounts of all customers are charged in order to cover the large losses generated by the losing customers. All customers would then lose part or all of their accounts, and receive only a pro-rated refund of the account equity remaining after the large losses by other customers has been covered. So, if your broker has considerable capital, this protects you from losing your account when other customers have massive uncovered losses. If your broker has only meager capital, then you are greater danger of having other customers cause you to lose your account.
IB pays substantially more than Fed Funds and LIBOR, including on the first $10K of your account, if you take advantage of IB's facility for selling EFPs.
There are two problems with EFPs as I see it (for a futures trader at IB). It uses your spare cash and therefore all the funds are not available for margining (performance bond) transfer to and from the segregated Commodities Account. If you plan to be out of the market for a while EFPs might make more sense. Or if you are nervous and just want to reduce the amount of money in your trading activities EFPs might also be better than just collecting interest. EFP's also require management by the trader. Automatic interest does not. In an extreme case - EFPs are backed only by Options Clearing Corporation, which serves as clearinghouse for all options and SSF trading. An extreme scenario might involve default of the OCC and a long while getting any of your money back. Jack
No, your facts are wrong. If you invest your entire account in EFPs, half the account's equity will be available for use as performance bond on commodities futures overnite positions, and three-quarters of the account value will be available for performance bond on intraday commodities futures positions. EFPs do require management to maximize their return, but such management is a simple task, one far easier than trading, and well worth the effort. Someone who can't manage EFPs, I think, would never succeed as a trader. Yes, EFPs are only as good as the options and securities futures clearinghouse guarantee, and a black swan event could mean real trouble; but traders routinely expose themselves to such risks as a mere consequence of trading, so that EFPs present no risk not already presented by the very act of trading.
Nothing wrong with my facts, it's a problem with your reading and understanding. I said It uses your spare cash and therefore all the funds are not available for margining (performance bond) transfer to and from the segregated Commodities Account. As you point out only about 1/2 to 3/4 of your funds are available for futures trading. Jack