Portfolio margining aligns the amount of margin collateral required to be held in a customer’s account with the risk of the portfolio as a whole. Portfolio margining first became available on a limited basis in July 2005 and was expanded in April 2007. A portfolio margin requirement is calculated by simulating market moves up and down, and accounting for offsets between and among all products held in the account that are highly correlated. For example, options on the S&P 500 Index (SPX) receive offset with options on the SPDR® S&P 500® ETF Trust (SPY) and options on the SPDR® Dow Jones® Industrial Average ETF Trust (DIA). Portfolio margin requirements are covered in Cboe Rule 10.4.
The longstanding practice for strategy-based margins is to require margin based on set formulas for a single option position or recognized strategy (e.g., a spread), regardless of what other offsetting positions are held in the account and regardless of potential market moves. Therefore, in certain cases, such as being long a put and long the underlying stock, there is no recognition of the fact that the value of one position gains when the value of a another (correlated) declines. Each position must be margined separately, unlike portfolio margining. Strategy based margin requirements are covered in Cboe Rule 10.3. Portfolio margining is a margin methodology that sets margin requirements for an account based on the greatest projected net loss of all positions in an identified group of products (with related risk characteristics) determined by a model using multiple pricing scenarios. The goal of portfolio margining is to set levels of margin that more precisely reflect actual net risk of the products in the portfolio. The customer may benefit from portfolio margining in that margin requirements that are calculated based on net risk are generally lower than alternative “position” or “strategy” based methodologies for determining margin requirements. Lower margin requirements allow the customer to make more efficient use of the capital allocated to an account. The instruments included in a portfolio margining program can be limited to related instruments that are subject to the same regulatory regime (i.e., only securities, or only futures), or they can also include related instruments subject to different regulatory regimes (i.e., securities and futures).
The framework used for portfolio margining was developed by the Options Clearing Corporation (OCC). This framework, known as OCC’s TIMS system (Theoretical Intermarket Margin System), prescribes how profits and losses are calculated, the assumed market moves (i.e., price shocks) to apply and how offsets are applied. Under industry rules, all broker-dealers must use the theoretical option values published by OCC at the end of each business day to calculate the profit or loss on each position in a portfolio margin account.
This website is only a brief summary and should only serve as a supplement to careful review of relevant Cboe rules and federal securities laws dealing with margin requirements. The requirements explained here are based on publication date rules and regulations, and therefore, subject to change. This website should be used as a reference document and is not intended to be an all-encompassing restatement of Federal Reserve Board and Exchange margin rules. Brokerage firms may require customers to post higher margins than the minimum margins specified on this website. For more information on margin requirements for options, please contact Derivative Strategy at Cboe - (312) 786-7718. In addition please see the discussion of margins in the Characteristics and Risks of Standardized Options publication.