Portfolio Margin

What Is Portfolio Margin?

Portfolio margin alludes to the modern composite-margin policy that must be kept up with in a derivatives account containing swaps (counting credit default swaps), options, and futures contracts. The objective of portfolio margining is to offset the risks to the lender through merging, or netting, positions to account for a portfolio's overall risk. It regularly results in radically lower margin requirements for hedged positions compared to traditional policy rules. Portfolio margin accounting requires a margin position that is equivalent to the leftover liability that exists after all offsetting positions have been gotten against one another.

For instance, on the off chance that a position in the portfolio is netting a positive return, it could offset the liability of a losing position in a similar portfolio. This would reduce the overall margin requirement that is vital for holding a losing derivatives position.

Figuring out Portfolio Margin

Margin is the guarantee that an investor needs to deposit with their broker or exchange to cover the credit risk the holder presents when they borrow cash from the broker to buy financial instruments, borrow financial instruments to sell them short, or go into a derivatives contract.

Portfolio margin requirements have just been as of late founded in the options market, in spite of the fact that futures traders have partaken in this system beginning around 1988. The Cboe Global Markets (Cboe) forces rules on margin accounts. In 2007, it acquainted expanded margining requirements with all the more closely adjust portfolio margin sums with the riskiness of a customer's whole portfolio.

Portfolio risk is to be estimated by mimicking the impact of market volatility. This changed system of derivative margin accounting has freed up capital for options investors, permitting them more leverage, which recently was required for margin deposits under the old procedure based margin requirements that were established during the 1970s.

Special Considerations

Margin accounts are likewise subject to regulatory requirements spread out by the Federal Reserve Bank's (Fed) Regulation T, a package of rules that oversee customer accounts. Also, the New York Stock Exchange's Rule 431, Nasdaq's Rule Option 6C, and the brokerage industry's self-regulatory agency, the Financial Industry Regulatory Authority (FINRA) Rules 2360 and 4210, administer how brokers oversee margin accounts.

Among FINRA's requirements, broker-dealers who offer portfolio margin accounts must meet "explicit criteria and standards to be utilized in assessing the suitability of a customer for composing uncovered short option transactions," and lay out and monitor "a base equity requirement." Broker-sellers must likewise monitor, report, and increase margin requirements on accounts with high groupings of individual securities. Furthermore, broker-vendors must furnish customers with and receive their affirmation of, FINRA-supported written statements depicting the risks implied in the accounts. Broker-vendors are additionally required by Securities and Exchange Commission (SEC) Exchange Act rules to isolate customer account assets from the institutions.

Highlights

Frequently, portfolio margin limitations bring about much lower margin requirements for hedged positions than would somehow or another be the case.
Portfolio margin is a set of risk-based margin requirements intended to offset risks to the lender by adjusting margin requirements to the general risk of a portfolio.
Portfolio margin is used for derivatives accounts where long and short positions taken in different instruments can be gotten against each other.