z. Good Faith Violations (US Options & Futures)

Good Faith Violation (GFVs)

What is a good faith violation (GFV)?

A good faith violation (GFV) occurs when a cash account buys a stock or option with unsettled funds and liquidates the position before the settlement date of the sale that generated the proceeds. Stocks and options now settle trade date plus one business day, or more commonly known as T+1. A cash account is not limited to a number of day trades. However, you can only day trade with settled funds.

Cash accounts are not subject to pattern day trading rules but are subject to GFV's. Pattern day trading (PDT) rules only pertain to margin accounts.

What happens if I get multiple GFVs?

Five or more GFVs = 90-Day Closing Only Restriction

Good faith violations cannot be resolved. Once you receive your fifth good faith violation in a rolling 12-month period, it will result in a 90-day restriction to closing-only on the account. We understand that GFVs can occur, but receiving one isn't the end of the world. If you do receive one, you'll want to keep track of how many you've had to avoid being subject to the 90-day closing-only restriction.

GFVs remain on the account for a rolling 12-month period. If an account is reopened from the 90-day closing-only status and receives another GFV the account will be set to closing-only again.

What is Trade Settlement?

Understanding settlement can avoid a GFV

The key to avoiding GFVs is having a solid understanding of settlement. When you buy or sell stocks or options in a cash account, the cash used for a purchase, or the proceeds from a sale, is not delivered until the settlement date.

Let's use a real-life, non-trading example to better explain settlement. You lend your friend £20, and he promises to repay you tomorrow. The next day arrives, and your friend pays you back. The loan is now settled! This is the same concept as trade settlement.

Examples of GFVs

Example with Stock (Settlement: T+1)

Assume in the stock example below the proceeds being used to day trade are unsettled.

*Using the proceeds from selling 100 MU

^Good Faith Violation is generated

A GFV occurs on Monday with the sale of 100 shares of CRM since the proceeds from the sale of 100 shares of MU do not settle until Tuesday.

Example with Options (Settlement: T+1)

Cash account starts the day with $500

*Using the proceeds from selling 5-lot XYZ Calls @ 1.50

^Good Faith Violation is generated

Much like the stock example, a GFV occurs on Tuesday after the sale of the ABC puts since the proceeds from the sale of the XYZ calls do not settle until Wednesday. Since the proceeds of the XYZ calls were immediately used to purchase the ABC puts, the liquidation of the puts generated a GFV.

How do Banking Holidays affect GFVs?

Be aware of Banking holidays

There are some instances when the markets are open for trading, but banks are closed, affecting trade settlement dates. The two banking holidays that can affect trade settlement dates are Columbus Day, which typically lands on a Monday in mid-October, and Veterans Day, which occurs in mid-November. However, the day Veterans Day lands on varies. In short, the settlement day on filled trades or trades scheduled to settle on a banking holiday gets delayed by one day. To view upcoming banking holidays, please click here. (Please note you are leaving IG's website and heading to federalreserve.gov)