Customer Portfolio Margin
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Overview
On December 12, 2006, The Securities and Exchange Commission (SEC) approved much anticipated rule changes proposed by the Chicago Board Options Exchange (CBOE) and the New York Stock Exchange (NYSE) allowing broker-dealers to use a risk-based portfolio approach for the margining of customer accounts effective April 2, 2007.
This expansion of customer portfolio margining helps U.S. equities markets take a major leap forward allowing securities firms to participate on a level playing field with the futures and international equities markets as it relates to customer margining. Current margin rules governing U.S. equity markets follow a strategy-based approach requiring broker-dealers to identify approved hedged positions (or strategies) and imposing a set margin requirement for each position. Portfolio margining allows broker-dealers to group products based on a related underlying asset into portfolios with the margin requirement based on the risk of the portfolio as opposed to a set amount.
This risk-based approach is based on OCC's TIMS margin methodology, which determines the maximum loss associated with a portfolio given a percentage move in an underlying asset. A portfolio containing an offsetting position in the derivative and underlying asset reflect less market risk and requires less equity to collateralize the account. This provides additional leverage to customers' capital available for reinvestment. The approach has been the standard for U.S. futures and international securities markets for years.
Investors wishing to learn more about the new customer portfolio margining rules, can find some useful tools and literature available at http://cpm.theocc.com.
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