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

• Portfolio margin is available only on USDT settled futures and options contracts. This means futures, including perpetual contracts, and options on BTC and ETH are eligible for portfolio margining

• Portfolio margin is not available on MOVE contracts

• If an account is in portfolio margin mode, you would be able to trade only those contracts in this account that support portfolio margin mode, i.e. futures and options on BTC and ETH.

• The margin mode of any position or open order cannot be changed. This means that if you wish to activate portfolio margin for an account, you must not have any open positions or orders in that account

• Your entire account balance is used for portfolio 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 or a group of the portfolio margined positions together. You can do this by placing a basket order

• Because margin requirements are measured and maintained for the entire portfolio, liquidation prices for individual positions in a portfolio are not available

• Portfolio 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 portfolio margin or make changes to the portfolio margin methodology to better reflect market conditions. The exchange will try to provide sufficient time for traders to manage their portfolio margined positions/ orders in the event of such changes.

Using portfolio margin

• To use portfolio margin in an account, you need to select portfolio margin as the margin mode for the account.

• The USDT equity of your account must be at least 500 for you to open new positions. Portfolio margined accounts where this condition is not met are automatically placed into "reduce-only mode". In reduce-only mode, you can only close existing positions, but cannot open new positions.

Portfolio margin calculation methodology

Portfolio 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.

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

Portfolio 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 scenarios.

Underlying price range: The price stress range is defined around the current price of the underlying with the percentage span varying with the underlying

Underlying	Price stress - down	Price stress - up
BTC	-10%	10%
ETH	-15%	15%

Example: If current BTC price is 35000, then in risk margin computation, BTC price will be varied from 35000 * ( 1 - 10%) = 31500 to 35000 * (1 +10%) = 38500.

Implied volatility (IV) range: The volatility stress range is defined around the current mark IV and is dependent on the time to expiry of an options.

IV max up = 45% * (30/DTE)^0.30

IV max down = 30% * (30/DTE)^0.30

where DTE = days to expiry

Days to expiry (DTE)	IV max up	IV max down
1	124.84%	83.23%
30	45.00%	30.00%
90	32.37%	21.58%
365	21.26%	14.18%

Example: If the current mark IV for a BTC option due to expire in 90 days is 60%, then in the risk margin computation, IV will be varied between 38.42% and 92.37%.

We create 29 scenarios (including two extreme risk scenarios), each with a unique combination of underlying price movement and IV movement. The underlying price is changed in steps of 0%, 33%, 50%, 67% and 100% of the price stress range, in both up and down directions. For IV, three values are considered: unchanged, up ( IV max) and down (IV min). For each scenario, PNL of the portfolio is computed.

Scenario	Underlying price change as % of price stress range	Volatility change
1	Up 100%	Up
2	Up 100%	Unchanged
3	Up 100%	Down
4	Up 67%	Up
5	Up 67%	Unchanged
6	Up 67%	Down
7	Up 50%	Up
8	Up 50%	Unchanged
9	Up 50%	Down
10	Up 33%	Up
11	Up 33%	Unchanged
12	Up 33%	Down
13	Unchanged	Up
14	Unchanged	Unchanged
15	Unchanged	Down
16	Down 33%	Up
17	Down 33%	Unchanged
18	Down 33%	Down
19	Down 50%	Up
20	Down 50%	Unchanged
21	Down 50%	Down
22	Down 67%	Up
23	Down 67%	Unchanged
24	Down 67%	Down
25	Down 100%	Up
26	Down 100%	Unchanged
27	Down 100%	Down
28	Up 300%	Up
29	Down 300%	Up

Extreme scenario risk: To fully capture the risk of deep OTM options, two extreme risk scenarios are considered. In these scenarios, price is moved up/ down 3x of the price range and IV is moved up. However, only 1/3rd of the resulting loss is considered in the Risk Margin computation.

Risk Margin = max portfolio loss across the 29 stress 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

$$MF = \sum_{Maturities} MF_{Options} +MF_{Futures}$$

Margin Floor for short options in a given maturity

Sum of notional sizes of short option positions and orders for a given maturity date is the Short 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 in the selected maturity is less than or equal to Base% Notional

$$OM\% = Base\%$$

If Short Options Notional Size in the selected maturity 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 USDT	0.0000005%
ETH	0.5%	100,000 USDT	0.000001%

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

Margin Floor for short options in the selected maturity 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 in a given maturity

Sum of notional sizes of long option positions and orders across option contracts of a given maturity 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 for the selected maturity is less than or equal to Base% Notional

$$OM\% = Base\%$$

If Long Options Notional Size for the selected maturity 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 USDT	0.0000005%
ETH	0.5%	100,000 USDT	0.000001%

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

Margin Floor for long options for the selected maturity 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.

The margin floor for options across all maturities is then computed as per the following equation:

$$MF_{Options} = \sum_{Maturities} max (MF_{LongOptions}, MF_{ShortOptions})$$

The above equation indicates that for a given maturity, the higher of Margin Floor for long options and Margin Floor for short options is considered. And, across maturities, Margin Floor for options is additive.

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 FM% are as follows

Underlying	Base%	Base% Notional	Slope
BTC	0.5%	200,000 USDT	0.0000005%
ETH	0.5%	100,000 USDT	0.000001%

Furthermore, the value of FM% is capped at 2% for BTC and 5% for ETH.

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.

Greeks adjustment prior to expiry

On Delta Exchange, futures and options contracts are settled at 30 min time weighted average price (TWAP) of the underlying index. The use of TWAP as settlement risk effectively results in linear reduction of the delta risk exposures of futures'/ options' positions in the portfolio in the 30 mins leading to the expiry of these contracts. This may have a bearing on the risk and hence, margin requirement of the portfolio.

We factor this phenomenon into Risk margin calculations by linearly reducing the size of positions in about to expire futures or options contracts in the last 30 mins. For example, if N contracts is the size of position in an option contract, N is linearly reduced to zero over the last 30 min of expiry. And, in the computation of Risk Margin, it is the reduced position size that is used.

Mathematically, this scheme can be described as follows:

For each position in a fixed expiry futures or option,

Effective Position Size = Actual Position Size * Expiry Factor

whereas, Expiry Factor = 1 if time_to_expiry > 30 min Expiry Factor = time_to_expiry (min)/30 if time_to_expiry <= 30 min

Risk Margin is computed using Effective Position Sizes rather than Actual Position Sizes.

Impact

The above described adjustments start showing up in Risk Margin when we head into contract expiries . For example, if a portfolio consists of an ITM call option and equal amount of short perpetuals, this portfolio would be delta neutral before the TWAP period. As the TWAP period starts, the risk position of the ITM options will reduce and the risk scenario margin would increase. Traders need to consider this adjustment as increased margin requirements may lead to portfolio liquidation in case of insufficient account equity.

Liquidation methodology

Portfolio 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 portfolio margin liquidation

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

1. All open orders in portfolio margined contracts are canceled

2. Margin requirement for the portfolio is recomputed after assuming that the delta risk of portfolios of each coin/ underlying have been completely hedged by taking appropriate positions in the perpetual contract of the respective underlyings. It is worth noting that if margin sufficiency can be achieved by making a subset of coin portfolios delta neutral then the remaining coin portfolios will remain unimpacted

3. 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 portfolio 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 portfolio margined positions or orders or place new portfolio 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.