Interactive Brokers is raising minimum margin requirements on clients’ accounts in anticipation of increased market volatility ahead of the U.S. presidential election.
In an email sent to investors and posted on Twitter, the discount brokerage firm noted that “elevated option implied volatilities indicate that the markets will be confronting elevated volatility both before and after the November 2020 election.”
As a result, the firm believes “it’s appropriate to start controlling leverage in a measured fashion in advance.”
Steve Sanders, Interactive’s executive vice president of marketing, told the Financial Times that the firm is “continuously evaluating the current market environment and our margin requirements are a reflection of that.”
The margin increase will take effect gradually, starting Sept. 28 for initial margin requirements and Oct. 5 for maintenance margin requirements, culminating in an increase as much as 35% above normal margin requirements for each.
A Reg T margin account, having an initial margin requirement of 50% and a maintenance margin requirement of 25%, will carry new requirements of 67.5% and 33.75%, respectively, after the change. Futures and futures options accounts subject to risk-based margins will also see margin increases.
Interactive Brokers says the increases will be implemented after the market close in New York on the designated day and take effect the next trading day.
The online brokerage firm, which operates in more than 135 markets worldwide, is familiar with what can go wrong with margin accounts when markets turn exceptionally volatile. In April, when the price of the May 2020 NYMEX oil futures contract fell to an unprecedented -$37.63, several of the firm’s clients who held long positions in cash-settled oil contracts based on the NYMEX price lost more money than the equity held in their accounts.
Interactive Brokers chose to pay the margin calls for those clients, which initially totaled $88 million but ended up costing the firm $103 million, according to its second-quarter earnings report.
As of the end of August, the firm had 948,000 client accounts, 44% more than the total the year before. Client equity holdings totaledd $237.8 billion, 54% higher than the prior year, and client margin loan balances of $30.4 billion, 19% higher than the year before.