Study Notes:
CFDs are contracts between the client and IBKR that deliver the return of an underlying instrument. Currently IBKR CFDs are available on stocks, major indices and FX pairs.
CFDs can be traded in both Cash and Margin accounts, and there is a single CFD permission enabling trading of the three types of CFDs.
CFD trading is only available in certain countries. Legal residents of the US, Canada, Hong Kong, New Zealand and Israel are prohibited from trading CFDs. Residents of Spain can trade CFDs only if they are either MiFID Professionals or clients of a Spanish Introducing Broker or a Professional Financial Advisor, who have the regulatory responsibility to provide the required risk warnings to their clients.
EU residents and residents of Japan, Singapore and Australia can trade CFDs issued by their local IBKR entity in their local-entity universal accounts.
Stock CFDs
IBKR currently offers over 8000 Share CFDs covering the principal markets in the US, Europe, and Asia, as well as South Africa and Brazil.
IBKR applies a direct market access model (DMA). When a client places an order for a CFD, the trading system enters a Smart-routed order for the hedge-stock. When the hedge order is filled, the client’s CFD order is filled at the same price. Any non-marketable CFD limit orders are visible on the underlying exchange, ensuring a stock-like trading experience.
Since IBKR applies a DMA model (and does not widen the spread like many other CFD brokers), we charge commissions on CFD trades.
Market data for stock CFDs is the Smart market data for the underlying stock, and clients must subscribe to the underlying market data to see real-time data.
Financing is applied on the notional value of the contract, in contrast to margin stock where financing is applied to the margin loan balance in the account. This is because the CFD margin requirement cannot be used to finance the position, rather it is a security deposit like the margin requirements for futures. Interest is payable by the client on long positions and receivable on short positions.
Importantly, interest is applied to settled positions. If, for example, a client opens a position on Monday interest will start accruing on Wednesday, T+2. If the client then closes the position on Friday, interest will continue to accrue over the weekend and the following Monday until the trade settles on Tuesday.
Most order-types, including auctions, accumulate/distribute and IB Algos are available for CFDs.
Stock CFD Corporate Actions
CFDs participate in most corporate actions, reflecting the economic effect of the corporate action for CFD holders as if they had been holding the underlying security. This will be done through a cash adjustment, a position adjustment, delivery of a new security or CFD, or a combination of these. CFD holders however cannot participate in voluntary actions such as tender offers.
In cases where the corporate action is complex and we are unable to determine an accurate adjustment, the CFD position may be closed out prior to the ex-date.
A dividend adjustment is recorded as a dividend payable/receivable when a share passes its ex-dividend date and is paid/charged on the pay date for the underlying.
If a choice between cash and stock is offered (choice dividend), IB will reflect the dividend as a cash adjusting payment-in-lieu (“PIL”) for long CFD position holders. Short position holders are charged a PIL.
Dividends are generally applied net of withholding tax to long positions, and gross to short positions. Since IBKR is the actual recipient of the dividend on its hedge stock, the withholding rate reflects the tax treaty rate between the hedging IBKR entity and the issuer country. In most cases the applied rate is 15%.
US stocks are the exception; because of IRS rule 871 (m) we are required to pass on the dividend gross to clients and withhold tax at a rate that applies to each client individually, based on the client’s country of residence and applicable treaties, if any.
Index CFDs
IBKR offers CFDs on 13 major stock market indices in the U.S., Europe and Asia, such as the S&P 500 and the DAX 30. For copyright reasons the symbols used are stylized, e.g. IBUS500 and IBDE30. The trading unit is the index level, i.e. there is no multiplier. The size of the trade is Quantity X price, making it possible for clients to trade in fractions of the size of the corresponding future.
An Index CFD does not directly reference the corresponding cash index. The index used to determine the value of an index CFD is a synthetic index derived from the related future.
In the futures market fair value is the equilibrium price for a futures contract. It is the price at which an investor effectively pays the appropriate rate of interest, and is compensated for the dividends he forgoes by holding the future rather than the underlying shares.
The fair value is determined by adjusting the cash index as follows, taking into account the time remaining to expiry: Cash Index Value + Interest – Dividends = Future at Fair Value
To determine the value of the IBKR Index CFD, we reverse the process: Actual Futures Price – Interest + Dividends = IBKR Index CFD Value
Having established the level for the synthetic index, the actual CFD quotes show spreads and ticks that reflect those of the underlying future. IB charges a commission rather than widening the spread, enabling a transparent comparison between the returns of the Index CFD and the related future.
A dividend is paid based on ordinary dividends for the constituents of each index, proportionate to their weight in the index. Dividends are accrued on the ex-date and settled T + 2. No dividends are paid on IBDE30 as dividends are re-invested in the index (total return index).
There are no corporate actions applied to Index CFDs as corporate actions are reflected as adjustments to the cash index level, and flow through to the CFD via the fair value adjustment described above.
Interest is calculated on the nominal value of settled positions (T+2).
Index CFD market data is free, but permission is required for system reasons.
Metals CFDs
A London Gold or Silver CFD enables you to have exposure to price movements of physical Gold or Silver without owning the physical metal.
The IBKR London Gold and Silver CFDs reference unallocated physical Gold and Silver traded on the London bullion market in units of one Troy Ounce. There is no multiplier, i.e. the size of the trade is Quantity X price.
Unallocated means that the bullion dealer continues to hold title and the investor has a claim on the bank as an unsecured creditor. In the case of a CFD that claim is indirect, as our clients trade a CFD issued by IBKR, who in turns has an unallocated position in the metal. Physical delivery is not possible for the CFDs.
IBKR receives quote streams from approximately 10 major bullion-dealing banks, in much the same way it does for cash forex. IBKR Smart routes between the banks, and the best available price at any given time becomes the reference price for the CFDs. IBKR does not add a spread to the banks’ quotes.
Interest is calculated on the nominal value of settled positions (T+2).
Metals CFD market data is free, but permission is required for system reasons.
Note that the main difference between the metals CFDs and the cash commodity product is the regulatory framework. Quotes, commissions, and margins are identical.
Forex CFDs
IB Forex CFDs are available for the same 85 tradable currency pairs IB offers as Leveraged Spot FX, with identical low commissions and margin rates. Quotes are the same as for spot, as are available order types and tools such as the FX trader.
Forex CFDs are rolled over reflecting the benchmark interest rate differential of the relevant currency pair. This is in principle similar to the TOM Next rolls used by other brokers but offers greater stability as benchmark rates generally are less volatile than swap rates.
The carry interest for IB Forex CFDs is based on a currency-pair specific benchmark and a spread. The benchmark is the difference between the IB benchmark rates for the two currencies. It is calculated as + BM Base currency – BM Quote currency, to which a spread is added. As for all CFDs, interest is calculated on settled positions. Settlement is T+2, except for RUB and CAD T+1.
Margin
A risk-based maintenance margin (MM) is applied based on 5 historical standard deviations, subject to a minimum of 10% for stock CFDs.
Index CFDs are margined at the pro-rated requirement for the corresponding future, subject to a 5% minimum.
FX CFDs have the same margin rates as cash leveraged forex, both MM and IM.
Initial margins (IM) are 1.25 x MM.
Stock CFDs are also subject to the same house margin requirements as the underlying stock. For example, all UK stocks have a minimum margin of 18% and all Hong Kong stocks 20%, because of country risk.
Concentrated stock CFD portfolios may also be assessed a concentration charge. To calculate the charge, we apply a 30% requirement to the two largest positions and 5% to the remaining positions. If the sum is greater than the sum of the standard margins calculated as above, the concentration charge is applied as the margin requirement for the account.
In practice, any portfolio with less than 10 holdings is likely to be margined based on concentration.
Regulatory Margins – EU Entities and IBUKL
European regulations require that MiFID retail clients are subject to leverage limits and other protections related to their CFD trading. The provisions apply to all retail CFD clients, whether they reside in the EU or not.
The leverage limits apply as initial margin, and the liquidation threshold (i.e. maintenance margin) is defined as 50% of the original initial margin paid when the position was first opened:
- Stocks 20% IM
- Major indices 5% IM, minor indices 10%
- Major FX pairs 3.33% IM, minor pairs 5%
Importantly, we apply IB margins whenever they are higher than the regulatory minimums. The IB IM requirements are typically higher for most indices and FX pairs, and for stocks whenever house margins or concentration are applied
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Supporting documentation for any claims and statistical information will be provided upon request.
Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
Disclosure: Contracts for Difference (CFDs)
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 58.4% of retail investor accounts lose money when trading CFDs with IBKR. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
