Portfolio Margin and Intraday Trading
Regulatory Obligations and Related Considerations
Regulatory Obligations
FINRA Rule 4210(g) (Margin Requirements) permits member firms to apply portfolio margin requirements—based on the composite risk of a portfolio’s holdings—in margin accounts held by certain investors as an alternative to "strategy-based" margin requirements. Member firms are required to monitor the risk of the positions held in these accounts during a specified range of possible market movements according to a comprehensive written risk methodology.
Related Considerations
- Do your firm’s policies and procedures for monitoring the risk of their investors’ portfolio margin accounts comply with Rule 4210(g)(1), in particular:
- maintaining a comprehensive written risk methodology for assessing the potential risk to the member's capital during a specified range of possible market movements of positions maintained in such accounts;
- monitoring the credit risk exposure of portfolio margin accounts both intraday and end of day; and
- maintaining a robust internal control framework reasonably designed to capture, measure, aggregate, manage, supervise and report credit risk exposure to portfolio margin accounts?
Findings and Effective Practices
Findings
- Inadequate Recordkeeping: Failing to maintain position records in the required format and in an easily accessible location, as specified in the firm’s Portfolio Margin Application approval letter from FINRA.
- Incorrect Account Equity: Incorrectly computing the account equity used to determine the maintenance margin excess or deficiency by incorporating incorrect option prices (e.g., prices supplied by third-party vendors that varied significantly from the prices determined by the Options Clearing Corporation).
- Accounts Below Minimum Equity: Failing to ensure that portfolio margin accounts maintain the required minimum equity.
- No Internal Audit Review of Portfolio Margin Process: Not conducting an internal audit review of the portfolio margin process as part of the firm’s portfolio margin approval and as required by its Portfolio Margin Application.
Effective Practices
- Internal Risk Framework: Developing and maintaining a robust internal risk framework to identify, monitor and aggregate risk exposure within individual portfolio margin accounts and across all portfolio margin accounts, including:
- accounting for the risk exposure from prime brokerage and other accounts that trade away;
- conducting stress testing of client portfolios;
- closely monitoring client fund portfolios’ NAV, capital, profitability, client redemptions, liquidity, volatility and leverage to determine if higher margin requirements or management actions are required; and
- monitoring and enforcing limits set by internal risk functions and considering trigger and termination events set forth in the agreement with each client.
- Concentration Risk: Maintaining and following reasonably designed processes (reflected in the firm’s WSPs) and robust controls to monitor the credit exposure resulting from concentrated positions within both individual portfolio margin accounts and across all portfolio margin accounts, including processes to:
- aggregate and monitor total exposure and liquidity risks with respect to accounts under common control;
- identify security concentration at the single account level and in the aggregate; and
- measure the impact of volatility risk at the individual security level.
- Client Exposure: Clearly and proactively communicating with clients with large or significantly increasing exposures, according to clearly delineated triggers and escalation channels established by the firm’s WSPs; and requesting that clients provide their profit and loss position each month.
- Reporting: Maintaining controls to ensure portfolio margin data reported to FINRA is accurate, and providing FINRA with accurate explanation of significant changes in the reported data.
- Global Margin Programs: For firms that holistically monitor and hedge portfolio margin account exposure across affiliated entities, maintaining and enforcing appropriate inter-affiliate agreements that document a global margin program and provide regulatory transparency regarding the firm’s margin calculations.
- Staffing and Training: Maintaining a staff with sufficient subject-matter expertise, and providing training opportunities, related to portfolio margin.