Portfolio margining is a way of determining margins/performance bonds based on the largest potential loss found by valuing the portfolio over a range of underlying prices and volatilities. The point is for margin requirements to more accurately reflect the actual risk of the positions in an account.
It is now available for US stocks, OCC stock and index options, US single stock futures positions, US bonds, and Forex positions. Portfolio margining for most futures and futures options has been available since 1988, with great success.
In July 2005, the SEC approved a pilot program for the portfolio margining of index options.  This pilot was expanded in July 2006 to include equity options and single-stock futures. The early phases of the pilot were so successful that the SEC authorized an expanded program of portfolio margining for customer accounts. Prior to December 2006, when the SEC approved portfolio margining for qualified customer accounts (went into effect Apr. 2, 2007), strategy-based margin rules had been applied to option customers' positions for more than three decades.
On the surface, the changes implemented were simple. The new system would utilize a realistic analysis of risk exposure instead of relying on outdated formulas and set minimums to calculate margin requirements. The revised system would also take into account any offsetting positions that may exist in the account.
Depending on the composition of an investor's/trader's trading account, portfolio margin, in securities, can require less margin than under Reg T rules, which translates to greater leverage. Trading with greater leverage involves greater risk of loss.
Portfolio margining has been available in futures trading since the introduction of SPAN margining by the Chicago Mercantile Exchange in 1988, in response to the stock market crash of 1987. Since its implementation, SPAN has become the industry standard and is now the official performance bond mechanism of nearly every registered futures exchange and clearing organization in the United States, and many global entities.
Some of the regulatory changes subsequent to the financial crisis of 2008, such as the Dodd-Frank Act in the U.S. and EMIR in Europe, as well as Basel III, have called for greater capital an margin requirements among market participants. Portfolio margining has emerged as a way of making such requirements less onerous, or at least more efficient, by extending it to not only futures positions, but also cash securities and swaps.
- Portfolio Margining Gives Tech-Savvy Firms More Leverage, Securities Industry News, May 4, 2007
- Requirement Examples for Sample Options-based Positions, CBOE
- Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Customer Portfolio and Cross-Margining Requirements. Chicago Board Options Exchange.
- Frequently Asked Questions. optionsExpress.
- The Brave New World of Portfolio Margining. The Street.com.
- Fimat to offer portfolio margining on April 2. Reuters.
- Let's Talk About: Portfolio Margining - The Battle For Margin. The Options Insider.
- SEC APPROVES CBOE'S NEW PORTFOLIO MARGINING RULES TO BENEFIT CUSTOMER ACCOUNTS. Chicago Board Options Exchange.
- Risk-Based Portfolio Margining – The Time Has Come. U.S. Commodity Futures Trading Commission.
- What is Span. CME Group.