Portfolio Margin

What is Portfolio Margin

Portfolio margining is a risk based approach to margining that allows for effective margin coverage while ensuring efficient use of capital. In this method, the risk of a group of positions and orders in futures and options with the same underlying is analysed together to compute the combined margin requirement for the entire group. Hence the name portfolio margin.

Portfolio margin tends to be more capital efficient than isolated or cross margin, i.e. requires less margin for the same set of positions. This capital efficiency emerges when a portfolio has positions/ orders with offsetting risks. In cross or isolated margin, the margin requirement for a group of positions is simply the sum of the margin requirement for each position individually. So, recognition of offsetting risks is just not possible. Portfolio margin overcomes this limitation by assessing the risk of the entire group together.

Obvious examples of such portfolios are option spreads and futures calendar spreads. The combination of long and short positions in spread trades makes them much less risky than standalone long or short positions in the same contracts. This lowering of risk is taken into account in portfolio margin, unlike in the case of isolated or cross margin.

Key points about portfolio margin

Your entire account balance is used for margining
The margin requirement for a portfolio with offsetting positions (e.g. futures/ options spreads) is likely to be much lower than the margin requirement for positions individually. Consequently, you might end up in a situation, wherein closing one position might leave the rest of your portfolio insufficiently margined. In such cases, you may need to close all the margined positions together
Because margin requirements are measured and maintained for the entire portfolio, liquidation prices for individual positions in a portfolio are not available
Margin liquidation process is quite complex. The Liquidation engine attempts to reduce the risk and hence margin requirement of your portfolio through a combination of scaling down existing positions and acquiring new futures positions on your behalf
We may periodically update the parameters used in the computation of margin or make changes to the margin methodology to better reflect market conditions. The exchange will provide sufficient time for traders to manage their margined positions/ orders in the event of such changes.

Portfolio Margin calculation methodology

Margin is computed by stress testing the portfolio in a range of simulated market conditions. The margin requirement for the portfolio is set at a level that portfolio remains sufficiently margined in all the stress test scenarios.

Margin is comprised of risk margin, short option margin and contingency margins as per the following equation

Margin = max (Risk Margin, Margin Floor)

Risk Margin

Risk Margin is the maximum likely loss that the portfolio will incur in a range of simulated price and volatility shock scenarios. This is done in two steps. First, the applicable span for price and volatility shock is determined on the basis of portfolio aggregate notional value. And, then portfolio PNL is computed for various scenarios with the applicable price/ volatility shock spans.

Price/ volatility shock span calculation

Price and volatility shock span are dependent on the total notional of the trader’s portfolio and the underlying asset. Greater the notional, wider the span of simulated price and volatility shocks. Price shock span ranges from 2% to 10%. Volatility up shock span is from 9 vol points to 45 points and volatility down shock span is from 6 vol points to 30 vol points.

The following table illustrates the calculation of price shock span and volatility shock span as a function of aggregate notional size of a BTC portfolio of futures and options:

Price Shock Span

if Notional <= $500K

2% +0.00000004*(Notional - 500K)

if Notional > $500K but <= $2.5M

10%

if Notional > $2.5M

Vol Down Shock Span

if Notional <= $500

6% +0.00000012*(Notional -500K)

if Notional > $500K but <= $2.5M

30%

if Notional > $2.5M

Vol Up Shock Span

if Notional <= $500K

9% +0.00000018*(Notional -500K)

if Notional > $500K but <= $2.5M

45%

if Notional > $2.5M

The following table shows the shocks for the specified portfolio notional:

Notional (in $)

Price Shock Span

Vol Down Shock Span

Vol Up Shock Span

200,000

500,000

1,000,000

12%

18%

5,000,000

10%

30%

45%

10,000,000

10%

30%

45%

20,000,000

10%

30%

45%

Once the price and volatility shock spans are known, we create 29 scenarios (including two extreme risk scenarios), each with a unique combination of the underlying’s price movement and implied volatility (IV) movement.

Underlying’s price scenarios: The underlying’s price is changed in steps of 0%, 33%, 50%, 67% and 100% of the price shock span range, in both up and down directions, around the current value of the underlying’s price.

For example, if the current price of BTC is $35000 and the price shock span is 10%, risk scenarios would be created using the following prices: 35000, 35000 * (1 +/- 3.33%), 35000 * (1 +/-5%), 35000 * (1 +/-6.67%) and 35000 * (1 +/-10%).

IV scenarios: Using the volatility shock span values, IV scenarios are computed around the current mark IV, as per the following equations

IV max up = Vol up shock span * (30/DTE)^0.30 IV max down = Vol down shock span * (30/DTE)^0.30 where DTE = days to expiry

If Vol up shock span is 45% and Vol down shock span is 30%, IV max up and IV max down change with DTE as follows:

Days to expiry (DTE)

IV max up

IV max down

124.84%

83.23%

45.00%

30.00%

32.37%

21.58%

365

21.26%

14.18%

These values of IV are considered in the risk scenario analysis: (a) IV Unchanged, i.e. IV = mark IV, (b) IV Up, i.e. IV = mark IV + IV max up and (c) IV Down = mark IV + IV max down

The underlying’s price can take 9 different values and IV can take 3 different values. Therefore, we have 27 unique combinations of Underlying’s price and IV that serve as risk scenarios. The PNL of the trader’s portfolio is computed in all these scenarios. Extreme scenario risk: To fully capture the risk of deep OTM options, two extreme risk scenarios are also considered. In these scenarios, price is moved up/ down 3x of the price span and IV is moved up. However, only 1/3rd of the resulting loss is considered in the Risk Margin computation.

Scenario

Underlying price change as % of price stress range

Volatility change

Up 100%

Unchanged

Up 100%

Down

Up 67%

Unchanged

Up 67%

Down

Up 50%

Unchanged

Up 50%

Down

Up 33%

Unchanged

Up 33%

Down

Unchanged

Down

Down 33%

Unchanged

Down 33%

Down

Down 50%

Unchanged

Down 50%

Down

Down 67%

Unchanged

Down 67%

Down

Down 100%

Unchanged

Down 100%

Down

Up 300%

Down 300%

Risk Margin = max portfolio loss across the 29 risk scenarios

Margin Floor

Margin Floor is applied to ensure a minimum margin is charged for all portfolios. Margin Floor scales with the notional size of the portfolio and is bigger for bigger portfolios, and is comprised of Margin Floor of options and Margin Floor for futures

MF = MF_{Short\_Options} + MF_{Long\_Options}+MF_{Futures}

Margin Floor for short options

Sum of notional sizes of short option positions and orders across all options is the Options notional for Margin Floor

Short\ Options\ Notional = \sum_{Options} \ Position + Sell\ orders

Options contracts where the user has a long position, but the size of sell orders in the contract exceed the position size, such contracts too are included in the above equation.

Next, Options Margin% (OM%) is computed. If Short Options Notional Size is less than or equal to Base% Notional

OM\% = Base\%

If Total Short Options Notional Size is greater than Base% Notional

OM\% = Base\% + Slope * ( Short\ Options\ Notional - Base\%\ Notional)

The values of the parameters involved in the computation of OM% are as follows

Underlying

Base%

Base% Notional

Slope

BTC

0.5%

200,000 USD

0.0000005%

ETH

0.5%

100,000 USD

0.000001%

The value of OM% is capped at 2% for BTC, 5% for ETH and 10% for the other underlyings.

Margin Floor for options is computed using the following equation:

MF_{Short\_Options} = \sum_{Short\ Options}max (5\% * Premium, OM\% * Notional)

Please note that in the above equation, sell orders that are not going to close an existing position are included in the premium computation.

Margin Floor for long options

Sum of notional sizes of long option positions and orders across all options is the Options notional for Margin Floor

Long\ Options\ Notional = \sum_{Options} \ Position + Buy\ orders

Options contracts where the user has a short position, but the size of buy orders in the contract exceed the position size, such contracts too are included in the above equation.

Next, Options Margin% (OM%) is computed. If Long Options Notional Size is less than or equal to Base% Notional

OM\% = Base\%

If Total Long Options Notional Size is greater than Base% Notional

OM\% = Base\% + Slope * ( Long\ Options\ Notional - Base\%\ Notional)

The values of the parameters involved in the computation of OM% are as follows

Underlying

Base%

Base% Notional

Slope

BTC

0.5%

200,000 USD

0.0000005%

ETH

0.5%

100,000 USD

0.000001%

The value of OM% is capped at 2% for BTC and 5% for ETH

Margin Floor for options is computed using the following equation:

MF_{Long\_Options} = \sum_{Long\ Options}min(Premium, max (5\% * Premium, OM\% * Notional))

Please note that in the above equation, sell orders that are not going to close an existing position are included in the premium computation.

Margin Floor For futures

Futures notional for Margin Floor is the higher of the combined long or short positions across all futures and perpetual contracts in the relevant underlying

Futures\ Notional = \sum_{Futures} max( abs(Position + Long\ Orders), abs (Position + Short \ Orders))

MF_{Futures} = FM\% * Futures\ Notional

where, FM% is the Futures Margin % which is dependent on both Futures notional and the Underlying

If Futures Notional is less than or equal to Base% Notional

FM\% = Base\%

If Total Notional is greater than Base% Notional

FM\% = Base\% + Slope * (Futures\ Notional - Base\%\ Notional)

The values of the parameters involved in the computation of MF% are as follows

Underlying

Base%

Base% Notional

Slope

BTC

0.5%

200,000 USD

0.0000005%

ETH

0.5%

100,000 USD

0.000001%

Furthermore, the value of MF% is capped at 2% for BTC, 5% for ETH and 10% for the other underlyings.

Portfolio Margin requirement

In the discussion thus far, the implicit assumption has been that all the positions in the portfolio are entered into at current prices. We introduce a term, Unrealised cashflows (UCF) to factor in mark to market gains/ losses. For futures, UCF is equal to the unrealised PnL and for options, it is equal to the expected pay-off.

Portfolio margin requirements are computed using the following equations:

Initial margin = max (Risk margin, Margin floor) - UCF

Maintenance margin = 80% * (Initial margin + UCF) - UCF

If you do not have sufficient collateral to meet the Initial margin requirement, you cannot open a new position. And, if you do not have sufficient collateral to meet the Maintenance margin requirement, your portfolio goes into liquidation.

Order margins

The margin requirement for an order is equal to the increase in margin requirement of the portfolio after the order is added to it. The order limit prices are taken into consideration when computing the losses for the portfolio in various stress testing scenarios.

Liquidation methodology

Margined positions go into liquidation if the available collateral is not sufficient to meet the maintenance margin requirement. The key idea in liquidation is to reduce the margin requirement of the portfolio through a combination of reducing the portfolio delta and scaling down open positions.

Steps in margin liquidation

After each step, margin requirement is recalculated. The liquidation process stops as soon as a state is achieved in which collateral available for margining is more than the initial margin requirement.

All open orders in margined contracts are canceled
Margin requirement for the portfolio is recomputed after assuming that the delta risk of the portfolio has been completely hedged by taking appropriate position in the perpetual contract underlying
The percentage reduction in the sizes of all positions in the hypothetical delta hedged portfolio required to make the portfolio sufficiently margined is computed

Margin requirement reduction through delta hedging

Risk margin is the typically the biggest contributor to the margin requirement of a portfolio. When a portfolio is delta hedged, the portfolio value stays broadly constant as underlying price is simulated through the price stress range. This helps to reduce the margin requirement.

Theoretically, a portfolio could be delta hedged by trading either futures or options contracts. However, since liquidity in futures is typically greater than in options, only futures are traded to make the portfolio delta neutral.

Therefore, if your portfolio goes into liquidation, our Liquidation engine may take a position in the perpetual contract of the underlying on your behalf.

It is important to note that the actual execution of the trading actions of the Liquidation engine only once the final state which would be sufficiently margined is known. This means that if the Liquidation engine estimates that making the portfolio delta neutral would be sufficient, that step is executed. If not, the Liquidation engine executes trades for both delta hedging and position size reduction together.

Immediately after the Liquidation engine is done executing the above-mentioned trades, the portfolio is checked for margin sufficiency, i.e. is the initial margin required for the new portfolio is less than the available collateral. If yes, liquidation process stops. If not, steps 2 and/ or 3 of the liquidation process are repeated. This loop continues until the portfolio is sufficiently margined or completely liquidated.

What to expect in a margined liquidation

Please note that you will not have access to your portfolio while it is in liquidation. This means you will not be able to place close existing margined positions or orders or place new margined orders. Typically, the liquidation process should not take more than a few seconds.

Once the liquidation process is complete, we will send you an email which will have full details of the action taken by the Liquidation engine. We strongly encourage you to thoroughly review your updated portfolio. If you so wish, you could close the positions the Liquidation engine may have acquired to delta hedge your portfolio.

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Last updated 27 days ago