Derivatives Guide

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, ETH, XRP, SOL, AVAX, MATIC and BNB are eligible for portfolio margining
- Portfolio margin is not available on MOVE contracts
- Portfolio margin can be enabled only on a single underlying at a time. For e.g. if portfolio margin is enabled on BTC, then: (a) all USDT settled BTC futures and options contracts will be in portfolio margin mode, and (b) contracts for any other underlying cannot be moved to portfolio margin mode
- The margin mode of any position or open order cannot be changed. This means that if you wish to enable/ disable portfolio margin for a particular underlying, you must not have any open positions or orders in all the USDT settled futures and options on that contract
- Your entire account balance except what is in use for isolated margined orders and positions 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 the portfolio 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
- 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 provide sufficient time for traders to manage their portfolio margined positions/ orders in the event of such changes.

How to enable/ disable portfolio margin

- You can enable portfolio margin either from the margin mode selector on the top of the order placement panel or from the preferences page. Please note that if you choose to enable portfolio margin from the preferences page, it will be enabled by default on BTC.
- Once portfolio margin for an account is enabled, it will stay enabled on one of the eligible underlying for portfolio margin until it is disabled. You can disable portfolio margin on an account from the preferences page.

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 and contingency margins as per the following equation

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 stress - down

Price stress - up

BTC

-10%

10%

ETH

-15%

15%

XRP

-20%

20%

SOL

-20%

20%

AVAX

-20%

20%

MATIC

-20%

20%

BNB

-20%

20%

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.

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

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

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 27 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

Contingency Margins

Contingency margins aim to consider risk factors that are not adequately captured in change in underlying price or volatility. For example, a futures calendar spread (long BTC June futures/ Short BTC March futures) position will remain unperturbed by underlying price and volatility stress testing and will have no risk margin requirement. Similarly, the risk of a portfolio having short deep OTM options may be underestimated in risk margin calculations.

Contingency margin consists of future and option contingency margin.

Futures contingency margin is equal to sum of 1% of absolute notional position size for all the futures contracts in the portfolio

$Futures\ contingency\ margin = 1\% * \sum|Futures\ Notional|$

Option contingency margin is equal to 1% of absolute Option sum notional position. Here, Option sum is the sum of net short option positions across strikes for a given maturity. In doing this computation, short positions at a far OTM strike is nullified by long options positions at near ATM strikes.

$Option\ contingency\ margin = 1\% * \sum_{Expiries} \sum_{Strikes} Option\ sum$

To calculate the Option sum for a maturity, options are divided into two categories; one with strikes above the current price, and other with strike below the current price.

For each strike, Net option position is equal to sum of put and call positions discounted by a factor which depends on distance of the strike from the prevailing underlying price.

$Net\ Option\ Position = DF* Option\ Sum$

$where,\ DF (discount\ factor) = min (1, \%OTM/ 0.1)$

$and,\ \%OTM = |Strike\ Price - Underlying\ Price|/Underlying\ Price$

Spot = 50000

Category1 : Option positions with strikes above 50000

Strike

Call

Put

DF

Net position

Rolled over longs

Net short

51000

10

0

0.2

2

2

0

52000

-5

-10

0.4

-6

0

-4

54000

-10

-20

0.8

-24

0

-24

60000

10

-10

1

0

0

0

65000

-10

0

1

-10

0

-10

70000

40

0

1

40

40

0

â€‹

â€‹

â€‹

â€‹

â€‹

Category2 : Option positions with strikes below 50000

Strike

Call

Put

DF

Net position

Rolled over longs

Net short

49000

0

0

0.2

0

0

0

48000

0

-10

0.4

-4

0

-4

46000

0

10

0.8

8

8

0

40000

0

-10

1

-10

0

-2

35000

0

0

1

0

0

0

20000

0

0

1

0

0

0

â€‹

â€‹

â€‹

â€‹

â€‹

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.

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

$Options\ notional\ for\ margin\ floor = \sum_{Options} Short \ positions + Sell\ orders$

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

$Futures\ notional\ for\ margin\ floor = max (\sum_{Futures} Long\ positions + Buy\ orders, \sum_{Futures} Short \ positions+ Sell\ orders$

$Total\ notional = Options\ notional \ for\ margin\ floor+ Futures\ notional\ for\ margin\ floor$

$Margin\ floor = mm\% * Total\ Notional$

where, mm% is the minimum margin% which is dependent on both Total notional and the Underlying

$mm\% = 0.2\% + Slope * max (0, Total\ notional - Max\ leverage\ notional)$

Slope and Max leverage notional values are as follows:

Underlying

Slope

Max leverage notional

BTC

0.0000005%

200,000 USDT

ETH

0.000001%

100,000 USDT

Rest

0.000002%

50,000 USDT

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 = min (Risk margin + Futures contingency margin + Option contingency 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 Risk 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.

An order which will not get executed within the Price or volatility stress testing range does not incur any margin. Furthermore, Contingency margins are not applicable for orders.

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.

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 the portfolio has been completely hedged by taking appropriate position in the perpetual contract underlying
- 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

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.

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.

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.

Last modified 1mo ago