How Portfolio Margin Works
Portfolio margin uses advanced mathematical models to measure the net risk of an overall portfolio and determine the margin requirements based on maximum potential loss, given changes in price and implied
volatility for a security class or product group. This can offer substantial margin relief over the arbitrary 50% Regulation T margin requirement for each equity security position in a portfolio, allowing a customer the benefit of increased day trade and overnight leverage.
House
margin requirements may be higher due to the following factors: concentration, liquidity, float and country of issue.
Eligibility
In order to qualify for Portfolio Margin, a Terra Nova account must be approved for uncovered option writing and have a minimum balance of $100,000.
Products Subject to Portfolio Margin Relief
- Marginable equity securities, as defined by Regulation T
- Listed options
Fixed income securities, futures, US bonds, penny stocks and ForEx positions are not eligible for portfolio margin at this time.
Overnight Regulatory Margin Requirements
| Equities |
Long Options |
Short Options |
| 15% requirement |
100% of premium |
The greater of $37.50/contract or:
High cap/broad based index options: 8% of underlyer
Non-high cap/broad based index options: 10% of underlyer
Narrow based index options: 15% of underlyer
Equity options: 15% of underlyer
|
Day Trade Buying Power Calculation
Day trade buying power will be determined as follows:
Accounts with a balance of between $100,000 and $5 million
4:1 leverage will be extended on exchange excess for day trade buying power, as determined by the requirements detailed in the table above.
Accounts with a balance of $5 million and greater
There are no exchange day trade margin requirements. Appropriate credits will be issued to the account for day trade purposes at the sole discretion of Terra Nova’s Risk Management team.
Portfolio Margin Model from Penson
Terra Nova makes use of its Introducing Broker relationship with Penson Financial Services, Inc. for portfolio margin accounts. Pensons Portfolio Margin Model has taken the
OCC’s Theoretical Intermarket Margining System (TIMS) methodology and supplies the base margin computation for each eligible product. Both long and short positions in any eligible product are grouped with its underlying instruments and related instruments to form a portfolio. The margin required for each portfolio is assumed to be the greatest loss over the 10-day intervals ranging from -15% to +15%. Each portfolio is subject to a per contract minimum if $.375 for each listed option, multiplied by the contract’s or instrument’s multiplier. The total margin required for an account is the sum of the greatest loss from each portfolio.
Pensons Portfolio Margin Model makes the additional individual adjustments listed below. Penson will use the sum of the results to calculate the customers total portfolio margin requirement.
- Low Volume Products/Concentration Adjustment: Eligible products within a portfolio may not be able to be liquidated over 24 hours either due to the product having a low trading volume or a concentrated customer position. Both situations pose risk that should be mitigated by increased margin.
- High Volatility Adjustment: Eligible products may have above average volatility resulting in added risk and may require additional margin.
- Backtesting Adjustment: Penson monitors the number of times the account begins the day with a negative net liquidation value.
A SEC rule change in 2002 initiated a pilot program for self-clearing NYSE members and member organizations to use a prescribed methodology to margin securities for individuals, broker-dealers or other organizations that maintain account equity of at least $5 million.
Portfolio margin rules account for the reduced risk of a balanced portfolio with hedged positions, offering substantial margin relief. Accordingly, accounts that maintain concentrated or illiquid positions will be subject to higher house requirements.
