Portfolio Margin

Portfolio Margin (PM) refers to a collection of requirements of risk-based margin formulated to mitigate the lender's risk through the alignment of margin requirements concerning the portfolio's general risk. Accounts of derivatives use it where short and long positions are taken regarding balancing different instruments against each other.

It uses overall portfolio risk to calculate the margin requirements according to scenario analysis of differing market conditions instead of individual positions. It is used mostly by trading companies to decrease margin requirements and optimize capital efficiency by offsetting risk within the portfolio.

Portfolio margin represents a risk-dependent margin technique helping calculate margin requirements per the possible net loss of overall portfolio positions. For this purpose, it uses computer modeling to evaluate risk under multiple pricing scenarios. The PM also aims at offsetting risks by netting, balancing, or consolidating positions to account for a portfolio's overall risk. As a result, it lowers margin requirements for mitigated positions in contrast to traditional margin rules.

PM has been utilized in derivative accounts in which short and long positions of different instruments could be balanced or netted against one another. Thus, it provides a more risk-based and detailed approach to margin requirements. It has significantly impacted risk management and tracking pertaining to the financial world. Hence, it offers a more capital-effective and efficient method to manage the risks of trading.

One can effectively apply the PM using the steps below:

• First of all, check whether one fulfills the eligibility criteria. 
• Then create and maintain a methodology of written risk to evaluate possible risks of every member.
• After that use the theoretical pricing model to calculate margin requirement.
• Then continuously monitor credit risk exposure of PM accounts both at day end and intraday.
• After that, do regular stress testing of all portfolios to examine the impact on worst market scenarios and adjust the PM requirements accordingly.
• During volatile market situations, increase house margin requirements on real real-time basis.
• Finally, conduct an internal audit review of all PM processes to keep all controls and procedures up to date and effective.

While calculating PM:

• The long stock has its base in the maximum largest theoretic loss that would occur in case the stock dropped or rose by 15%. 
• 15% becomes the lowest percentage change conserving equities but could be adjusted concerning greater change in percentage as per the position or stock warrants it. 

For instance, if the price of a stock decreased by 15%, remaining inside a minus or plus 15% range, then the largest loss related to the long position would be the same point. It means that if one has 200 shares of equity at $40, then a decline of 15% would lead to a 0.15*$8000 or 1200, making its PM requitements $1200. Moreover, many companies offering PM services like Fidelity portfolio margin, Ameritrade portfolio margin, IBKR portfolio margin, and Tastytrade portfolio margin use similar approaches.

Let us use a few examples to understand the topic.

Example #1

An online article published on April 3, 2024, discusses the extension of Binance’s margin of portfolio product to common users having a minimum balance of 100000 USDT concerning cross-margin and future accounts. The new margin of portfolio wallet consolidates cross-margin wallets, USD-M Futures, and COIN-M Futures so as to streamline collateral management.

Such an expansion allows traders to utilize a greater range of collateral assets throughout the 878 trading pair. As a result, it enhances risk management and capital efficiency. Besides, the integration eases the portfolio adjustments and provides dedicated API endpoints. Hence, it improves the holistic trading experience of a wider range of users.

Example #2

Let us assume that an imaginary company called Crtyptia cryptocurrency exchange located in Old York City provides a margin of portfolio account to its account holders or users. In the same exchange, Aliza, being an expert trader, has a balance of 200000 CTD (Cryptia Dollar) in her Futures and Cross Margin accounts. Hence, she decides to use the portfolio's margin to consolidate her positions throughout 200 cross-margin pairs and 300 futures contracts within a single wallet.

As a result, she could leverage her portfolio efficiently and impactfully, decreasing her overall margin needs by almost 25%. Furthermore, Alice optimizes her trading strategy using assets such as Blocktoken and Cryptocoin as collateral. Therefore, in this way, she takes advantage of streamlined asset management given by the system of margin of the portfolio.

It plays an important role in the trading activity of traders due to its various advantages:

• It allows traders to enhance their purchasing power by decreasing margin requirements across their portfolios.
• It gives higher flexibility, facilitating larger positions having lesser capital particularly in market volatility.
• It conducts accurate risk evaluation by considering the correlation among various assets.
• It increases risk management by balancing losses in one particular position with profits in another position inside the portfolio.
• Traders can free up funds for extra investments or trades as it provides lower margin requirements.
• It also enables higher leverage that increases returns with exact amounts of funds.
• It can lower the costs of trading using more effective margin calculations.

Let us use the table below to understand the differences amongst the three: