synthetic USD borrow using EFPs at IB

Discussion in 'Retail Brokers' started by obsidian, Feb 27, 2012.

  1. obsidian


    Does anyone have experience here with trading long single stock EFPs (I'd sell stk short, buy futures) to generate synthetic USD borrow at IB?

    Do they allow you to withdraw the excess cash generated? Can they allow this with cross-margined ETFs (such as SPY v. ES) since SPY borrow rates are lower than most single stock and idiosyncratic dividend risk is obv a lot lower.

  2. Would probably work in a portfolio margin account. Try it in their simulator and see. It's not explicitly listed whether SSF's vs. stock get margin relief. You're not going to get to draw out 100% of the proceeds in any event.

    For Reg T, I'm reading it as 50% margin on the short stock, and 20% margin on the SSF, so you'd only have 30% left.

    Dig into for specific offset info on PM, although IB's requirement are higher in some cases.
  3. obsidian


    Which simulator do you mean?

    Yes I have a portfolio margin account. I have about 300k in an ib account, looking to borrow as much as possible to withdraw at 2% or lower using short stock vs. long future strategy.
  4. They have a demo version of TWS where you can test various PM scenarios. Or if you have your own, just put in on in small size and see for yourself.

    I'm interested to know, so please report back.
  5. IB-AN

    IB-AN Interactive Brokers

    If the objective is to generate free cash which can then be withdrawn or used to support other trading activities the answer is no as, absent other equity, the cash proceeds from the stock sale are going to be needed as equity to satisfy the margin requirement (as those proceeds need to be deposited with the lender of the security to collateralize the borrow).

    As an example, assume an EFP purchase with a stock trading at $100 (i.e., long 100 shares short the SSF). The initial margin requirement on the position in a Reg. T account would be 30% of the short stock market value, or $3,000 and the maintenance margin requirement 5% of the short stock market value, or $500 (the portfolio margin requirement would be likely be near or below the Reg T maintenance as this model better recognizes hedges; although this depends upon the particular EFP as well as other positions held in the account).

    An account holder would therefore need to have equity of at least $3,000 to hold this position overnight, with the account equity at the point of execution looking as follows:

    Cash $13,000
    Short stock ($10,000)
    Net Liquidating Equity $3,000

    This type of transaction is often used by those seeking to swap a long stock position, maintaining the same economic long exposure, but potentially at a more advantageous financing rate and margin requirement.

    Also, regulations preclude a broker from providing margin offset between a security (SPY) and a commodity (ES). The OneChicago SSF is a hybrid future product which can be carried in a securities account and for which margin offset against another security is allowed.
  6. IB-AN

    IB-AN Interactive Brokers

    Pardon the typo, that should be short 100 shares and long the SSF.
  7. obsidian


    Ok understood. Thanks for this detailed explanation, really appreciate it.
  8. Thanks.
  9. Daal


    Correct me if I'm wrong but if a trader has a lot of margin left but is negative in cash, by doing this transaction he will effectively generate some cash(Thus stop paying margin interest) at the expense of some margin(Which might not be relevant anyway for the trader). Effectively this would be a USD borrow being done a libor or a bit above libor instead of IB's ~1.5%

    Am I making a mistake here?