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 new, risk-based margin available for qualified accounts. Portfolio margin computes real-time margin for stock and option 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 industry standard option 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.
|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|
|Treatment of volatility is applied to margin requirement||25% SRO requirements; long equities = 25% requirement; short equities = 30% requirement. *SRO - Self- Regulatory Organization -all securities and commodity exchanges in the United States|
|Generally broad-based indices: -12% and 10%; equities: +15% and -15%; allows up to 6.6 to 1 leverage||TD Ameritrade uses 30% minimum house maintenance requirement on long and short equities|
|Allows for correlation and margin offsets between similar investments||Option 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|
A Brief History of Portfolio Margin
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.
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, you can learn more and find out how to apply by clicking the link below.
In a future article about portfolio margin, I'll provide more details with how it works and what it means for individual traders like you.
Get More with Portfolio Margin
Consider applying if portfolio margin is right for you. You must meet minimum requirements and have at least $125,000 in total equity.*