← InstitutionalLesson 20 · 4:21
Portfolio margin, Reg-T and SPAN: capital per unit of edge
Summary
You can explain strategy-based (Reg-T) margin, risk-based portfolio margin and SPAN, and why the same book can need very different capital under each. You can explain why a low margin is not a safe number, hold the bigger of margin and your own stress test, and compare books by capital per unit of edge.
Key terms
- margin
- Money your broker holds against what a sold position could lose.
- strategy-based margin (Reg-T)
- A method that works out each position's margin on its own with a fixed formula, giving no credit for hedges.
- portfolio margin
- A risk-based method that prices the whole book at a set of price moves and takes the worst loss as the margin.
- SPAN
- The method used for futures options that prices a book in exchange-set scenarios of price and volatility moving together.
- capital per unit of edge
- The capital a book needs divided by the edge it earns in a year; lower is better.
- FINRA
- The US body whose published rules shape strategy-based and portfolio margin for brokers.
Check yourself
Answer each question to see why the right answer is right.
1. Under the strategy-based example, the hedged XYZ book needs $23,486. Why is it so much higher than the other methods?
2. Portfolio margin prices the whole book at ten evenly spaced moves from down 8% to up 6% (for a large broad index). In the example the worst point loses $1,540. What does that window miss?
3. How does SPAN, used for futures options, work out the margin?
4. What capital does the lesson say a desk should hold against a book?
5. Under the Reg-T example the unhedged book needs $3.56 per dollar of edge and the hedged $4.72. Using the desk's stress test as capital, the hedged needs $1.76 and the unhedged $2.27. What follows?
Finished the video and the quiz? .