Portfolio Margin
Contents
Demystifying Portfolio Margin: A Comprehensive Guide
Decoding Portfolio Margin
Portfolio margin is a sophisticated risk-based approach to margin requirements, specifically tailored for derivatives accounts containing various instruments like swaps, options, and futures contracts. Unlike traditional margin policies, portfolio margining consolidates positions to assess the overall risk of a portfolio, resulting in lower margin requirements for hedged positions.
Understanding the Concept
Margin serves as collateral deposited by investors to cover credit risks when engaging in financial transactions. Portfolio margin, introduced in the options market more recently but existing in the futures market since 1988, aligns margin requirements with the overall risk of a customer's entire portfolio. The objective is to simulate market volatility to accurately assess portfolio risk.
Navigating Regulatory Frameworks
Regulatory bodies such as the Federal Reserve Bank and industry-specific entities like the Financial Industry Regulatory Authority (FINRA) govern margin accounts through various rules and regulations. Broker-dealers offering portfolio margin accounts must adhere to specific criteria to evaluate customer suitability, monitor account equity, and manage risk concentrations.