Options Traders Favor Intraday Margining

Terry Flanagan

Portfolio margining on options positions offers substantial cost savings in terms of reducing the amount of capital needed to be set aside against losses, but it also requires intensive computational resources that are likely to be out of reach for all but the largest banks.

The Options Clearing Corp. currently calculates regulatory margin requirements after the end of the trading day, leaving the active trader without a good estimate of margin during the day, and thus exposed to margin calls based on current trading activity, according to Robert Newhouse, CEO of Victor Technologies.

“The OCC model for margin requirements necessitates a very large amount of stress testing,” Newhouse told Markets Media. “Stressing every single position up and down specific values and calculating worst loss factors requires a real-time view of your margin requirements, as opposed to having to wait till the end of the day when the OCC releases what the requirements are.”

OCC’s Customer Portfolio Margin System supports portfolio-based margining of customer accounts. Based on the TIMS margin methodology, CPM takes an OCC generated master file of profit and loss values and a user generated position file as input. The TIMS methodology is then applied to generate a margin computation that can be viewed via hypertext pages from the account down to the position level.

Victor Technologies’s Portfolio Margin module offers a view of regulatory margin requirements based on the OCC methodology during the trading day, allowing a user to better manage their OCC as well as house margin requirements, Newhouse said.

Broker dealers and clearing firms that offer customer portfolio margining can benefit from intra-day margining. “Any type of firm, any type of sell-side entity, whether it’s a broker-dealer, a prime broker, introducing broker or the clearing firm itself can leverage our tool to have a view into real time margin on a per tick basis that can validate their internal calculation or act as their primary margin calculator,” Newhouse said.

Victor Technologies provides a risk-management platform, margin calculation tools and a market volatility feed for U.S.-listed equity and index options, with various options available for inputs, business logic, smoothing, and delivery mechanism.

It recently enhanced the system to calculate Value at Risk (VaR), which measures the amount of loss a portfolio is likely to sustain under various assumptions.

“There are a number of entities that either consider VaR all important, or more importantly have investors that might wish to see what their VaR is,” Newhouse said. “We incorporated VaR into our platform so that we can provide a wider range of features to the buy-side community that’s requesting them.”

Volatility arbitrage funds and other funds that employ option hedging strategies are using the risk management platform to monitor margin requirement of their trading in real time, and the volatility feed for their own trading or to compare against their own generated volatility calculations.

“We’ve been very successful in the volatility arbitrage community,” said Newhouse. “A number of vol arb funds use our platforms to manage their risks. We’ve also had significant interest from hedge funds that use the tool primarily for providing their investors with visibility and transparency into the fund’s risk.”

Featured image via iStock

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