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Understanding Portfolio Margin

 

If you maintain a minimum of US $100,000 (or USD equivalent) equity/Net Liquidation Value in your margin account you may qualify for a lower margin requirement allowing for increased leverage in your portfolio. (To be eligible for a Portfolio Margin account you must have at least USD 110,000 equity in your account.)

 

What is the difference between Portfolio Margin and Regular (Reg T) Margin?

 

Under SEC approved Portfolio Margin rules and using our real-time margin system, Place Trade customers are able in certain cases to increase their leverage beyond Reg T margin requirements. For decades margin requirements for securities (stocks, options, and single stock futures) accounts have been calculated under a Reg T rules-based policy. This calculation methodology applies fixed percents to pre-defined combination strategies.

What is Portfolio Margin?

With Portfolio Margin, margin requirements are determined using a "risk-based" pricing model that calculates the largest potential loss of all positions in a product class or group across a range of underlying prices and volatility. This model, known as the Theoretical Intermarket Margin System ("TIMS"), is applied each night to U.S. stocks, OCC stock and index options, and U.S. single stock futures positions by the federally-chartered Options Clearing Corporation ("OCC") and is disseminated by the OCC to participating brokerage firms each night. The minimum margin requirement in a Portfolio Margin account is static during the day because the OCC only disseminates the TIMS parameter requirements once per day.

However, Portfolio Margin compliance is updated by Place Trade throughout the day based on the real-time price of the equity positions in the Portfolio Margin account. Please note, at this time, Portfolio Margin is not available for US commodities futures and futures options, US bonds, or Forex positions, but US regulatory bodies may consider inclusion of these products at a future date.

Portfolio or risk based margin has been utilized for many years in both commodities and many non-US securities markets, with great success. Dependent upon the composition of the trading account, Portfolio Margin may require a lower margin than that required under Reg T rules, which translates to greater leverage. Trading with greater leverage involves greater risk of loss. There is also the possibility that, given a specific portfolio composed of positions considered as having higher risk, the requirement under Portfolio Margin may be higher than the requirement under Reg T.

Part of the reasoning behind the creation of Portfolio Margin is that the margin requirements would more accurately reflect the actual risk of the positions in an account. Thus, it is possible that, in a highly concentrated account, a Portfolio Margin approach may result in higher margin requirements than under Reg T. One of the main goals of Portfolio Margin is to reflect the lower risk inherent in a balanced portfolio of hedged positions. Conversely, Portfolio Margin must assess proportionately larger margin for accounts with positions which represent a concentration in a relatively small number of stocks.

 

 

Portfolio Margin Eligibility

 

Customers must meet the following eligibility requirements to open a Portfolio Margin account:

 

    ■  An account must have at least US $110,000 (or USD equivalent) in Net Liquidation Value to be eligible for a Portfolio Margin account. Existing customers may apply for a Portfolio Margin account through Account Management/Trading Permissions at any time and your account will be upgraded upon approval.New Place Trade customers can apply for a Portfolio Margin account during the registration system process.

It should be noted that if your account drops below US $100,000 you will be restricted from doing any margin-increasing trades. Therefore if you do not intend to maintain at least US $100,000 in your account, you should not apply for a Portfolio Margin account.

    ■  New Place Trade customer accounts requesting Portfolio Margin will have Reg T rules in effect until their accounts are approved for Portfolio Margin. This may take up to 2 business days (under normal business circumstances) after initial account approval. Existing Place Trade customer accounts will also need to be approved and this may take up to two business days after the request. Both new and existing Place Trade customers will receive an email confirming approval.

    ■  Place Trade Canada customers are not eligible for Portfolio Margin accounts due to IDA restrictions. In addition, all Canadian stock, stock options, index options, European stock, and Asian stock positions will be calculated under standard rules-based margin rules so Portfolio Margin will not be available for these products.

    ■  Non-US Omnibus Broker (Long Position/Short Position) accounts are not eligible for Portfolio Margin accounts.

 

Portfolio Margin Mechanics

 

Under Portfolio Margin, trading accounts are broken into three component groups; Class groups, which are all positions with the same underlying; Product groups, which are closely related classes; and Portfolio groups, which are closely related products. Examples of classes would include IBM, SPX, and OEX. A product example would be a Broad Based Index composed of SPX, OEX, etc. A portfolio could include such products as Broad Based Indices, Growth Indices, Small Cap Indices, and FINRA Indices.

 

The portfolio margin calculation begins at the lowest level, the class. All positions with the same class are grouped and stressed (underlying price and implied volatility are changed) together with the following parameters:

 

A standardized stress of the underlying;

■   For stock, equity options, narrow based indices, single stock futures, and mutual funds the stress parameter is plus 15%, minus 15% as well as eight other points in-between.

■   For US market small caps and FINRA market indices the stress parameter is plus 10%, minus 10% as well as eight other points in-between.

■   For Broad Based Indices and Growth indices the stress parameter is plus 6%, minus 8% as well as eight other points in-between.

 

A market-based stress of the underlying;

■   A five standard deviation historical move is computed for each class. This five standard deviation move is based on 30 days of high, low, open, and close data from Bloomberg excluding holidays and weekends. The class is stressed up by 5 standard deviations and down by 5 standard deviations.

 

An implied volatility stress for options;

■   Implied volatility for each options class is increased by 15% and decreased by 15%.

 

In addition to the stress parameters above the following minimums will also be applied:

■   Classes with large single concentrations will have a margin requirement of 30% applied to the concentrated position.

■   A $0.375 multiplied by the index per contract minimum is computed.

■   The same special margin requirements for OTCBB, Pink Sheet, and low cap stocks that apply under Reg T, will still apply under Portfolio Margin.

 

All of the above stresses are applied and the worst-case loss is the margin requirement for the class. Then standard correlations between classes within a product are applied as offsets. As an example, within the Broad Based Index product 90% offset is allowed between SPX and OEX. Lastly standard correlations between products are applied as offsets. An example would be a 50% offset between Broad Based Indices and Small Cap Indices.

For stocks and Single Stock Futures offsets are only allowed within a class and not between products and portfolios. After all the offsets are taken into account all the worst-case losses are combined and this number is the margin requirement for the account. For a complete list of products and offsets, see the Appendix-Product Groups and Stress Parameters section at the end of this document.

 

Place Trade’s real-time, intra-day margining system enables us to apply the Day Trading Margin Rules to Portfolio Margin accounts based on real-time equity, so Pattern Day Trading Accounts will always be able to trade based on their full, real-time buying power.

Because of the complexity of Portfolio Margin calculations it would be extremely difficult to calculate margin requirements manually. We encourage those interested in Portfolio Margin to use our TWS Portfolio Margin Demo to understand the impact of Portfolio Margin requirement under different scenarios.

 

Call us at 919-719-7200 for a copy of our TWS Portfolio Margin Demo which may help you to understand the impact of Portfolio Margin requirement under different scenarios.

 

 
 

 

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