IB Reg T Margin Account

[bmichaud]

For those that have Interactive Brokers Reg T margin accounts...

 

Do you focus on SMA or Excess Liquidity for determining long term buying power?

 

Excess liquidity = equity + loan value - maintenance margin

 

Here is the SMA discussion:

 

http://ibkb.interactivebrokers.com/article/66

 

Bottom line, my question is this: can you make a purchase that brings the SMA account negative as long as Excess Liquidity is positive?

[Hielko]

I think excess liquidity is the only thing that matters for determining how much buying power you have, but you probably don't want to use so much leverage that this question is really relevant. Because if you have no excess margin room you will have positions auto-liquidated as soon as there is a slight drop in value.

[ERICOPOLY]

Bottom line, my question is this: can you make a purchase that brings the SMA account negative as long as Excess Liquidity is positive?

 

My amateur understanding is "No".

 

There are Fed margin rules and house margin rules.  The Fed rules prevent you from making a purchase with more than 2:1 margin.  The house rules allow your leverage to go higher -- that way if you initially start with 2:1 margin at the instant of purchase, if the price of the assets starts to drop your leverage can go higher (under the house rules).

 

That's why they explain it in a way that suggests you can make an additional $2,000 purchase under SMA margin if the assets appreciate by $2,000. 

 

The SMA doesn't go negative -- it's either a positive number, or it's zero.

 

Again, this is not professional advice.

 

 

[bmichaud]

That's what I've concluded, though I can't figure out why Excess Liquidity isn't the lesser of SMA or Excess Liquidity...

[ERICOPOLY]

That's what I've concluded, though I can't figure out why Excess Liquidity isn't the lesser of SMA or Excess Liquidity...

 

 

I believe Excess Liquidity is a product of the house rule thing.  Whereas SMA is the Fed rule thing.

 

So Excess Liquidity doesn't go to zero simply because SMA has.

 

[bmichaud]

Perhaps I'm splitting hairs, but why would you be able to technically buy under house rules (since excess liquidity is positive) while the SMA fed rules forbid you (because SMA is say $0)?

 

I'm probably chasing my tail, and the answer is SMA rules all but IB just leaves excess liquidity positive even though you really can't buy because you will violate SMA.

[muscleman]

For those that have Interactive Brokers Reg T margin accounts...

 

Do you focus on SMA or Excess Liquidity for determining long term buying power?

 

Excess liquidity = equity + loan value - maintenance margin

 

Here is the SMA discussion:

 

http://ibkb.interactivebrokers.com/article/66

 

Bottom line, my question is this: can you make a purchase that brings the SMA account negative as long as Excess Liquidity is positive?

 

I have an IB Reg T account, but I do not use margin. The only reason for me to have a margin account is because I would like to be able to buy a stock using unsettle proceeds immediately after I sell another stock. Fidelity allows this in a cash account, but IB does not. However, after I set up this account, I told the IB onboard guys to enable a setting that prevents me from actually using margin. In this way, I will be safe from a mis-click of a button.

I do not recommend using margin because it is too dangerous, especially in IB. However, I do use leverage by borrowing money from credit cards' 0% APR balance transfer and I am about to get a HELOC and draw that.

[ERICOPOLY]

Perhaps I'm splitting hairs, but why would you be able to technically buy under house rules (since excess liquidity is positive) while the SMA fed rules forbid you (because SMA is say $0)?

 

I'm probably chasing my tail, and the answer is SMA rules all but IB just leaves excess liquidity positive even though you really can't buy because you will violate SMA.

 

It isn't saying you can buy more.  It's a measure I believe of whether you have enough equity remaining to support your borrowing.  This has to be measured somehow so they can communicate to you how increasingly fucked you are getting as the prices of your stocks decline.

[bmichaud]

Ok ok makes sense!

[bz1516]

If you want to explore the limits of Reg T margin, why not just open up a portfolio margin account?

[scorpioncapital]

"SMA refers to the Special Memorandum Account which represents neither equity nor cash but rather a line of credit created when the market value of securities in a Reg. T margin account increase in value.  For example, assume the market value of securities purchased at a cost of $10,000 on margin (at 50%) increase in value to $12,000.  This $2,000 increase in market value would create SMA of $1,000, which provides the account holder the ability to either: 1) buy additional securities valued at $2,000 (assuming a 50% margin rate) without depositing up additional funds; or 2) withdraw $2,000 in cash, which may be financed by increasing the debit balance if the account holds no cash.

 

It should be noted that while an increase in market value over original cost creates SMA, a subsequent decline in market value has no effect on SMA.  SMA will only decline if used to purchase securities or withdraw cash and the only restriction with respect to its use is that the additional purchases or withdrawals do not bring the account below the maintenance margin requirement. SMA will also increase on a dollar for dollar basis in the event of cash deposits or dividends."

 

So from what I understand SMA is a tracking account created by market gains, cash transactions, or dividends.

 

I usually just look at excess liquidity, that's the important value for all practical purposes - including option writing.