What is portfolio margin and how does it work? (US options and futures)

Standard margin accounts are governed by the Federal Reserve Board’s Regulation-T (Reg-T) margining methodology. Reg-T requirements are based on a fixed percentage, position-based system. Conversely, portfolio margin (PM) account requirements are determined by the theoretical risk of your portfolio as a whole. This can result in lower requirements and greater flexibility for you.

Reg-T margin accounts hold a fixed percentage margin requirement as collateral which allows you to borrow cash to hold securities positions. When establishing a stock position, Reg-T requires investors to have 50% of the trade's value as the initial margin requirement and 25% (long stock) or 30% (short stock) of the position's value after that. For uncovered options strategies in a Reg-T account, the margin requirement to establish a position is based on a fixed, rules-based percentage. Maintenance margin requirements can vary under certain market conditions such as large implied volatility increases, hard-to-borrow stocks, and more.

PM is a risk-based methodology that allows you to have more transparency and alignment between margin requirements and the overall theoretical risk of the portfolio. PM calculates margin requirements by looking at the aggregate exposure of your portfolio. If you have a well-hedged portfolio, your margin requirement can be much lower than it would be with a Reg-T margin account.

• Can offer more flexibility than Reg-T accounts
• Initial and maintenance margin requirements are the same when establishing positions
• Allows for position correlations to determine margin requirement offsets
• Long in-the-money options are marginable
• Includes implied volatility when calculating the theoretical value of calls and puts to determine an account's margin requirement—a major component of an option pricing model to calculate risk

Flexibility in a PM account comes from lower buying power requirements, which means you can have greater risk even when the notional risk is the same as any other account. This also means your buying power requirements can fluctuate much more than a Reg-T margin account. It's important to understand all of the risks when trading in a PM account to avoid undesired exposure to the markets.

In a portfolio margin (PM) account, eligible positions undergo stress testing by hypothetical price moves in the underlying assets. These hypothetical price movements are utilized as inputs in our options pricing model to generate risk arrays* across a predefined price range, typically spanning from -20% to +20%. The price range is divided into ten equally spaced points. At each price point, there is a theoretical change in the profit or loss for both the individual position and the portfolio as a whole. PM aggregates the largest theoretical single-day loss for each position across the price range and deducts it from the account's net liquidation value to ascertain the remaining buying power.

*Risk Arrays: Each position's risk array scenario consists of a distinct market simulation. These simulations encompass variations in the underlying asset's price and implied volatility, both upward and downward. The position's margin requirement is determined by the largest loss observed in the risk array. These simulations are commonly referred to as stress tests.

Portfolio margin (PM) calculates various price point movements up and down from the current underlying spot price to generate risk arrays, which are utilized to determine a real-time theoretical single-day gain/loss. Positions may have different stress test ranges depending on the characteristics of the underlying asset, market volatility, concentration, and other factors. The buying power requirement for each position is determined by the largest theoretical loss observed.

• Individual stock and options positions are stressed with ± 20% price changes.
• Concentrated positions are evaluated using a greater percentage price move based on EPR (Expected Price Range) and PNR (Point of No Return).

Portfolio margin example

Let’s examine the risk analysis window to understand how stress tests generate risk arrays to determine margin requirements. For instance, if an account holds a short strangle (1 short OTM call and 1 short OTM put), the position will begin to incur losses as the underlying asset moves against it. Below is a risk array to illustrate this concept.

The default stress test (price volatility range) will be ± 20%. This indicates that we are testing for potential losses if the underlying asset's price were to increase by +20% or decrease by -20%. The "total" row above each position will display the theoretical one-day change in profit/loss for that position at various stress levels.

Below the "total" row, you can observe the 20% up and down maximum stress test levels and the corresponding risk array. If the underlying asset's price falls by 20% from a price of $161.82 to $129.46, then according to the risk array, the strangle would theoretically incur a loss of -$1,766.

Conversely, if the underlying asset's price increases by 20% from $161.82 to $194.18, the strangle would theoretically incur a loss of -$1,688. The portfolio margining system will consider the higher potential loss at all stress test scenarios, resulting in a buying power requirement of $1,766 to hold that strangle. In comparison, a Regulation-T margin account would likely have a buying power requirement closer to $3,000 in a normal market environment.