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Portfolio Margin and Intraday Trading

NEW FOR 2022

Regulatory Obligations and Related Considerations

Regulatory Obligations:

FINRA Rule 4210(g) (Margin Requirements) permits member firms to apply portfolio margin requirements—based on the composite risk of a portfolio’s holdings—in margin accounts held by certain investors as an alternative to "strategy-based" margin requirements. Firms are required to monitor the risk of the positions held in these accounts during a specified range of possible market movements according to a comprehensive written risk methodology.

Related Consideration:

  • Do the firm’s policies and procedures for monitoring the risk of their investors’ portfolio margin accounts comply with Rule 4210(g)(1), in particular:
    • maintaining a comprehensive written risk methodology for assessing the potential risk to the member's capital during a specified range of possible market movements of positions maintained in such accounts;
    • monitoring the credit risk exposure of portfolio margin accounts both intraday and end of day; and 
    • maintaining a robust internal control framework reasonably designed to capture, measure, aggregate, manage, supervise and report credit risk exposure to portfolio margin accounts?

Exam Findings and Effective Practices

Exam Findings:

  • Inadequate Monitoring Systems – Systems not designed to consistently identify credit risk exposure intra-day (e.g., do not include defined risk parameters required to produce notifications or exceptions reports to senior management; require manual intervention to run effectively) or end of day (e.g., cannot monitor transactions executed away in a timely manner).
  • Not Promptly Escalating Risk Exposures – Staff failing to promptly identify and escalate incidents related to elevated risk exposure in portfolio margin accounts to senior management, in part due to insufficient expertise.
  • Insufficient WSPs – Failing to maintain written supervisory procedures outlining intraday monitoring processes and controls.

Effective Practices:

  • Internal Risk Framework – Developing and maintaining a robust internal risk framework to identify, monitor and aggregate risk exposure within individual portfolio margin accounts and across all portfolio margin accounts, including:
    • increasing house margin requirements during volatile markets in real-time;
    • conducting stress testing of client portfolios;
    • closely monitoring client fund portfolios’ NAV, capital, profitability, client redemptions, liquidity, volatility and leverage to determine if higher margin requirements or management actions are required; and
    • monitoring and enforcing limits set by internal risk functions and considering trigger and termination events set forth in the agreement with each client.
  • Concentration Risk – Maintaining and following reasonably designed processes (reflected in the firm’s WSPs) and robust controls to monitor the credit exposure resulting from concentrated positions within both individual portfolio margin accounts and across all portfolio margin accounts, including processes to: 
    • aggregate and monitor total exposure and liquidity risks with respect to accounts under common control;
    • identify security concentration at the aggregate and single account level; and
    • measure the impact of volatility risk at the individual security level.
  • Client Exposure – Clearly and proactively communicating with clients with large or significantly increasing exposures, according to clearly delineated triggers and escalation channels established by the firm’s WSPs; and requesting that clients provide their profit and loss position each month.

Additional Resources