Understand the basic differences between portfolio margin and regulation T margin as well as the brief history behind portfolio margin.
How can an individual trader get risk-based margins like a market maker without owning (or leasing) a seat or trading on the exchange floor? Portfolio margin.
Portfolio margin is a risk-based margin available for qualified accounts. Portfolio margin computes real-time margin for stock and options positions based on their risk rather than the fixed percentages and strategy rules associated with Regulation T margin.
Portfolio margin at TD Ameritrade uses theoretical pricing models to calculate the real-time losses of a position at different price points above and below the current underlying price. The largest theoretical loss identified is the margin required for the position.
TD Ameritrade uses an industry standard options pricing model to calculate, in real time, the theoretical fair value for both put and call options by using inputs of underlying price, strike price, time to expiration, volatility, the risk-free interest rate, and dividend yield (if applicable).
The result of all this is frequently lower margin requirements and increased leverage when compared to Regulation T margin requirements. Here’s a breakdown of some of the other differences between portfolio margin and Regulation T margin.
| Portfolio margin | Regulation T margin |
|---|---|
| Maintenance excess (buying power) = Net liquidation value – margin requirements | Margin equity = Stock + (+/- cash balance) |
| No difference between initial and maintenance margins | Maintenance margin = 50% initial for marginable securities |
| Treatment of volatility is applied to margin requirement | 25% SRO requirements; marginable long equities = 25% requirement; short equities = 30% requirement. *SRO - Self- Regulatory Organization -all securities and commodity exchanges in the United States |
| Generally broad-based indexes: -12% and 10%; equities: +15% and -15%; allows up to 6.6 to 1 leverage | TD Ameritrade uses 30% minimum house maintenance requirement on short and marginable long equities |
| Allows for correlation and margin offsets between similar investments | Options requirements computed in real-time using FINRA rules and fixed percentages; please review Margin Handbook for details |
| Long options are marginable and can be used as collateral for other marginable positions | Long options are not marginable and have 100% requirement |
The Chicago Mercantile Exchange (CME) developed a risk-based margin model in 1988 for calculating margin requirements for future and options on futures.
On December 12, 2006, the Securities and Exchange Commission (SEC) approved a rule change to make portfolio margin available to brokerage firms. The Options Clearing Corporation (OCC) provided broker dealers with the only approved model, the Theoretical Intermarket Margining System (TIMS), which is a baseline minimum risk-based model to calculate margin requirements for portfolio margin accounts once a day after the equity market is closed.
FIGURE 1. A BRIEF HISTORY OF PORTFOLIO MARGIN.
Image source: TD Ameritrade
Now that you have an introduction to portfolio margin, and a basic understanding of some of the features and characteristics when compared to Regulation T margin, you can learn more about how portfolio margin works here.
Portfolio margining involves a great deal more risk than cash accounts and is not suitable for all investors. Minimum qualification requirements apply. Portfolio margining is not available in all account types.
Portfolio margining privileges subject to TD Ameritrade review and approval. Not all clients will qualify. Please consider your financial resources, investment objectives, and tolerance for risk to determine if it makes sense for your individual circumstances. Carefully read the Portfolio Margin Risk Disclosure Statement, Margin Handbook, and Margin Disclosure Document for specific disclosures and more details. You may also contact TD Ameritrade at 800-669-3900 for copies.