Interactive Brokers boosts margin requirements ahead of US election

Interactive Brokers is raising clients’ minimum margin requirements by more than a third to protect against market swings anticipated in the run-up to the US election and avoid a rerun of losses the online broker suffered earlier this year.

The US company, founded by electronic trading pioneer and billionaire Thomas Peterffy, will gradually increase the amount of money clients have to deposit as margin for their trades starting from September 28 — amounting to a 35 per cent increase by October 23. The move is designed to shield both the broker and its clients from a potential hit if the election triggers abrupt market declines.

Interactive told its clients that as volatility is expected to pick up both before and around the time of the US election, it was “appropriate to start controlling leverage in a measured fashion in advance”. The gradual rise in margin will be implemented after the New York market close each day, the company told clients late on Tuesday.

“We are continuously evaluating the current market environment and our margin requirements are a reflection of that,” Steve Sanders, Interactive’s executive vice-president of marketing, told the Financial Times.

The decision to cut the amount of leverage clients can build into trades comes after the Greenwich, Connecticut-based broker was stung earlier this year when many of its clients were caught on the wrong side of a collapse in oil prices. The company stepped in to pay $88m in margin calls owed to clearing houses.

Interactive’s decision is a sign that market intermediaries are stepping up their preparations for large price swings around the US election, particularly as retail trading has exploded in popularity during lockdown, with many amateur investors betting on a continuing rally in stocks.

Professional investors, meanwhile, are preparing to tackle a volatile period and the risk of a disputed election result. Futures markets are pricing in large price swings in financial markets for late October and early November.

Other brokers are also considering similar moves. Matt Brief, chief product officer at UK-based broker IG, said the company will decide “nearer the time” of the election on whether to raise the minimum amounts needed for financing trades.

Retail brokers suffered large losses in 2015 when the Swiss National Bank stunned investors by removing its minimum exchange rate for the euro and sent the currency soaring, causing large-spread losses for retail clients.