Portfolio Margining
James Barry, Executive Director
Collateral and Margin Services
Regulatory Issues
Guidelines
Regulation TReg T margin requirements will not apply to Portfolio Margin account; maintenance margin requirements only; will not eliminate other provisions of Reg T
Customer Eligibility Minimum equity requirements will be $100k for Registered Investment Advisors and $500k for all others
Day Trading NYSE Rule 431 guidelines apply
Re-hypothecation Re-hypothecation Rule 15c3-3 will apply; allows 140% of debit balance to be re-hypothecated
Short vs the Box No requirement for hedged portion of position
Guidelines (continued)
Equity CalculationTotal Liquidating Equity, including option market value, will be applicable
Risk/ Valuation Model Variations
Each B/D will be allowed to determine own schedule or model based margin policies; customers still required to meet regulatory margin minimum requirements
Foreign CurrencyCurrency exposure will be addressed in the Portfolio Margin model
Customer Account Options Portfolio Margin Account
onlyAll securities may be held in the Portfolio Margin account; NYSE Rule 431 will apply to all positions held not covered by the Portfolio Margin model
Portfolio Margin Account and Regulation T Account
Customers may opt to have both a Portfolio Margin and a Reg T account within a single Broker Dealer or multiple Broker Dealers
Clients will be responsible for designating which account the positions will be held
Opting In/ Out of Portfolio Margin No limit on number of security transfers between accounts, provided both
accounts have sufficient excess after position is moved; movements to alleviate a deficit in one account from an account with excess are permitted
Customer Account Options (continued) Guaranteed Accounts Minimum equity requirements as stipulated
in NYSE Rule 431 will apply based on the sum of the equity in both the guarantor and guaranteed accounts.
Margin Calls Failure to Meet Margin
Calls
If a client fails to meet a margin call within the 5 business day timeframe: B/D will have option of forcing liquidation or hedging positions to alleviate the margin call
B/D will not be allowed to take capital charges in lieu of customer’s obligation to meet margin call
B/D will be required to apply for additional time from the NYSE; request should give a detailed explanation of why additional time is necessary
Margin Calls (continued) Timing of Margin Calls Allowable time period for clients to meet
portfolio margin call will be 5 days
Meeting Margin CallsFederal calls will require physical cash movements for Guaranteed Accounts and customers with both a Portfolio Margin and Reg T account
Maintenance margin calls may be met via adjustment to cash available
Cross margining with futures will not be allowed. As Security Futures are securities, they will be included in the Portfolio Margin account.
Default treatment for securities held in a Portfolio Margin account but not calculated using portfolio margin schema will be governed by NYSE Rule 431
Pending Items
Foreign Currency Margin Treatment
Currency exposure will be addressed in the Portfolio Margin model developed by the Risk Working Group
Control and Restricted Securities
Determine whether Portfolio Margin model will accommodate securities with selling constraints
Stocks without Historical Data
Determine whether Portfolio Margin model will include below types of securities:
Newly Issued Securities Foreign Stocks Smaller US Stocks
Margin Model
Models
Sampled various risk-based margin calculation approaches that consider risk parameters such as price, volatility, liquidity, etc.
Considering one of the following methods: VaR based method relying on historical data Stress Test method based on predefined scenarios Proprietary Models requiring Regulatory approval
Each method has advantages over the current regime particularly with regard to risk reducing positions
Models
VaR Advantage: Consistent across multiple asset classes Disadvantage: Difficult to translate to a margin requirement
Stress Test Advantage: Easy to translate to a margin requirement Disadvantage: Assumptions about assets classes must be initially
defined
Proprietary Models Advantage: B/D can tailor margin requirements to specific
businesses Disadvantage: Added complexity to Regulatory oversight
Models
Elements of a Stress Test Model Set a benchmark margin requirement on a one sided, diversified
portfolio (e.g. 25%) Set a benchmark margin requirement on a balanced long/short,
diversified portfolio (e.g. 12.5% a side) Reprice options using standard models for each scenario Higher requirements on concentrated, illiquid portfolios Lower requirements on long/short unbalanced portfolios Add higher stress tests for
Volatile stocks Lower rated convertible bonds Less developed countries