If you have opened a securities account in the United Kingdom (UK), in addition to the cash account and the RegT margin account, you can also choose the portfolio margin account. If you meet the requirements for the Portfolio Margin account type, you can request a change of your RegT Margin account to a Portfolio Margin account in your account management (Client Portal).
In accordance with the rules established by the SEC and using our real-time margin system, there is an opportunity for our clients to extend their leverage levels beyond the Reg-T margin requirements. Margin requirements for securities accounts (trading equities, options, and single-stock futures) have been calculated for decades using a methodology based on Reg-T regulations. This calculation method applies fixed percentages to pre-defined combination strategies. Under the portfolio margin method, margin requirements are determined using a risk-based model that calculates the maximum potential loss of all positions in a product class or group of products for a range of underlying prices and volatilities. This model, also referred to as TIMS ("Theoretical Intermarket Margining System"), is applied by the Options Clearing Corporation (OCC) each night to positions in U.S. equities, OTC equities, index options and U.S. single-stock futures, and is also disseminated by OCC each night to all participating brokerage firms. The minimum requirements for portfolio margin accounts are static throughout the day, as the OCC determines and issues TIMS requirements only once a day.
However, Portfolio Margin Coverage is continuously reviewed and updated by us throughout the day based on the real-time retrieved prices of the equity positions in your Portfolio Margin Account. Please note that Portfolio Margin Accounts is not available for U.S. commodity futures and futures options, U.S. bonds, mutual funds, or forex positions. The US regulator is considering the inclusion of these products at a later date.
Depending on the composition of the trading account, a lower margin requirement may be required when using the portfolio margin method than under Reg-T regulations, giving the client more leverage. Trades with greater leverage also involve greater risk of loss. For specific portfolio compositions that are considered particularly risky, the margin requirement under the portfolio margin method may be higher than under Reg-T regulations. This is because the intent behind the portfolio margin method is to more accurately reflect the actual risk potential of the positions in your account. Therefore, in an account with a high concentration, the portfolio margin method may result in higher margin requirements than under Reg-T regulations. One of the primary objectives of the portfolio margin approach is to reflect the lower inherent risk of a balanced portfolio with hedged positions. In turn, the portfolio margin method must assess a proportionally higher margin requirement for accounts that have positions that represent a high concentration in a relatively small number of different stocks.
Prerequisite for the use of the portfolio margin
- The account must have a net liquidation value of at least $100,000 (or equivalent value in another currency) to be maintained as a portfolio margin account. (In addition, the account must be approved for trading in uncovered options). Existing clients can request to upgrade to a portfolio margin account at any time in the Account Management (Client Portal) on the > Account Settings> Account Type page. The account upgrade will take place after successful verification and confirmation. New customers can apply for a portfolio margin account directly during the account opening process. Please note that if your account balance falls below a threshold of 100,000 USD, your trading options will be restricted and you will not be able to make transactions that would increase margin requirements. Consequently, you should refrain from applying for a Portfolio Margin Account if you do not intend to keep at least 100,000 USD of capital in your account permanently.
- For new customers applying for a portfolio margin account, this account feature must be activated separately. This will be done (under normal business conditions) within two business days from the initial account confirmation. Please note: If your account is subsequently funded with an amount less than $100,000 net liquidation value in deposits, your trading options will be restricted such that no transactions can be made that would increase margin requirements. These restrictions will remain in effect until the net liquidation value is increased to over $100,000. Existing customers' accounts will also require confirmation of the upgrade, which may take up to two business days from the time of request. Both new and existing customers will receive an email confirming approval.
- For customers in Canada, portfolio margin accounts unfortunately cannot be offered due to IDA restrictions. In addition, for all positions in Canadian equities, equity options, index options, European equities and Asian equities, margin requirements are calculated based on standard rules-based margin procedures, i.e. portfolio margin is not available for these products.
- Accounts that have an equity balance below the minimum amount of $100,000 will be charged a margin surcharge. This surcharge successively brings the account closer to the margin requirements required under the Reg-T method as the equity value decreases.
How the portfolio margin method works
In the portfolio margin method, trading accounts are broken down into three groups of components:
- Classes that group all positions to the same underlying;
- Products that are closely related classes; and
- portfolios, which are closely related products.
Examples of classes would be, for example, IBM, SPX, and OEX. An example of a product would be a broad-based index composed of SPX, OEX, etc. For example, a portfolio may include products such as broad-based indexes, growth indexes, small-cap indexes, and FINRA indexes.
The portfolio margin calculation starts at the lowest level, the classes. All positions of the same class are grouped and stress tested together based on the parameters below (change in the price of the underlying and the implied volatility):
A standardized stress test of the underlying:
- For equities, equity options, narrow-based indices and single-stock futures, a range of plus/minus 15% with eight additional value points within this range is used as the stress test parameter.
- For US small caps and FINRA market indices, stress test parameters of plus/minus 10% (8 plot points within the range) apply.
- For broad-based indices and growth indices, a range of plus 6% and minus 8% with eight additional value points within this range is used as the stress test parameter.
- A market-based stress test of the underlying: For each class, a market movement of 5 standard deviations is calculated based on historical data. This movement of 5 standard deviations is based on Bloomberg data on the high, low, opening and closing prices from 30 days excluding holidays and weekends. Each class is tested assuming an upward movement of the market by 5 standard deviations and a downward movement of the market by 5 standard deviations.
- For broad-based indexes, the implied volatility factor increases by 75 % and decreases by 75 %.
- Implied volatility is increased by 150 % and decreased by 150 % for each option class
In addition to the above-mentioned stress test parameters, the following minimum requirements are applied:
- For classes with large individual concentrations, a margin requirement of 30% is applied to the position with concentration risk.
- A minimum per contract of 0.375 USD multiplied by the index is charged.
- For OTCBB, Pink Sheet and Low-Cap stocks, the same special margin requirements apply under portfolio margin conditions as under the Reg-T method.
- The initial deposit is 110% of the minimum deposit.
All of the above stress tests are performed. The worst case loss thus determined corresponds to the margin requirement for this class. The standard correlations between classes within a product are offset. For example, within the product class of broad-based indices, an offset of 90% is granted between the SPX and the OEX. Lastly, standard correlations between products are also applied as offsets. For example, an offset of 50% would be applied between broad-based indices and small-cap indices. For equities and single stock futures, offsets are only allowed within a class and not between products and portfolios. When all offsets are applied, all word case losses are combined and the resulting value equals the margin requirement for the account.
Thanks to our real-time-based intraday margin system, we can apply day trading margin rules for portfolio margin accounts based on real-time equity. This allows traders in pattern day trading accounts to always trade on the basis of their full real-time buying power.
Due to the high complexity of the portfolio margin calculation, a manual calculation of the margin requirements would be extremely difficult Customers interested in using the portfolio margin option are recommended to use our Demo account.