Under SEC-approved Portfolio Margin rules and using our real-time margin system, our 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. 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 volatilities. This model, known as the Theoretical Intermarket Margining 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 us 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 U.S. commodities futures and futures options, U.S. bonds, Mutual Funds, or Forex positions, but U.S. 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-U.S. 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.
Customers must meet the following eligibility requirements to open a Portfolio Margin account:
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:
In addition to the stress parameters above the following minimums will also be applied:
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.
Our 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.
Click here for the OCC's published list of Product Groups and Offset Parameters.