Changes to Funding Charges on Short Daily Shares Positions at IG

IG Index’s annoucement letter follows

Dear Mr.~~~~~

Due to the current environment of low interest rates, we are revising our charging method on short daily shares positions. Please read the following carefully to ensure that you understand the changes that will come into effect on 30 March 2009.

When calculating the adjustment made to a position rolled overnight, IG Index takes into account the interest rate of the currency in which you are dealing. For example, the amount of the adjustment on a sterling denominated bet is calculated as the latest London interbank offered rate (LIBOR) plus or minus 2.5% per annum, depending on whether you are long or short.

If you choose to roll a long bet on a sterling denominated share, the adjustment to the next morning’s opening price is calculated by adding 2.5% per annum to the one-month LIBOR. This results in a higher opening level the next morning; for example, when LIBOR was 3%, your opening level would reflect an adjustment of 5.5% per annum of the value of the held position (3% LIBOR + 2.5% = 5.5%).

Conversely, if you roll a short bet on a sterling denominated share, the adjustment reflects the one-month LIBOR minus 2.5%. Providing this equals a positive value, this results in a higher opening level, which is beneficial to a short position; when LIBOR was 3%, your opening level would reflect an adjustment of 0.5% per annum of the value of the held position (3% LIBOR – 2.5% = 0.5%).

However, in the current economic climate, LIBOR is reaching historic lows. This is causing the adjustment on short positions to appear often as a negative value, which results in a lower opening level. For example, if the one-month LIBOR is at 1.17%, the adjustment to a short bet on a sterling denominated share is 1.17% minus 2.5%, which equals -1.33% per annum:

LIBOR 1.17%
Rollover Charge – 2.5%
TOTAL: -1.33% per annum

In the past, IG Index has not adjusted your opening price if the adjustment calculates as a negative value. However, future adjustments will reflect these negative values, and short positions will be rolled with lower opening prices.

This change is effective Monday 30 March 2009. Positions held overnight from this date forward will be subject to the above changes.

Thoughts: Erm…so with Libor at historic low levels short positions will also start attracting a financing charge.

Tags: financing, funding charges, IG Index, igindex, libor

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