Interactive Brokers has told its trading clients that it will start asking them to increase margins by as much as 35% going into what is expected to be a turbulent US election season. This could see some US accounts requiring 67% initial margin on a trade with 25% maintenance margin.
Interactive Brokers told clients that elevated implied option volatilities were picking up. As with the Brexit vote in 2016, brokers everywhere are expecting to see higher market volatility and we can expect that UK brokers including providers of financial spread betting accounts to ask for higher margins on certain stocks and currency pairs.
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In the case of Interactive Brokers, the firm told traders it would be implementing higher margin requirements every day from normal levels, starting on 28 September. It said it anticipated the rate to be 35% higher by 23 October.
Maintenance margin requirements will also be raised gradually over the period 5 to 30 October. The new margin requirements will be implemented every day after New York market close. Volatility may also inform further changes to specific products and markets.
Implied volatility in the options market is expected to pick up considerably as we progress into the election season. And it may not end with the election itself. According to Goldman Sachs, options prices indicate an extended period of volatility after the election as well.
Interactive Brokers has admitted that it lost $88m during the collapse in crude oil prices in April. Some of its traders at the time were caught in long positions with equity in excess of their accounts.
Brokers increased their margin requirements ahead of the 2016 US election as well. At that time a number of brokers said they would stick to their guns, some offering 200:1 leverage while others introduced restrictions.
UK regulated brokers applied tactical margin restrictions on specific markets or currency pairs. OANDA cut leverage on six currency pairs including EUR/GBP and GBP/USD from 2% to 5%. FXCM increased margin on selected currency pairs from 1% to 2%. Saxo Bank raised margins on major FX pairs from 2% to 3% with some emerging markets currencies like the Mexican peso seeing as much as 15% margin.
This was all in 2016, of course. Many UK and EU brokers now offer much lower levels of leverage, so it may be they feel they won’t need to make any changes ahead of the volatility in markets in November. Traders using offshore brokers or experienced investor accounts can expect to receive further details on cuts on leverage in the next couple of weeks.