FINRA Announces Amendments to Make Permanent the Portfolio Margin Pilot Program
Portfolio Margin Program
Regulatory Notice | |
Notice Type Rule Amendment |
Referenced Rules & Notices NASD Rule 2520 NTM 07-11 NYSE Rule 431 |
Suggested Routing Compliance Legal Margin Risk Senior Management |
Key Topics Portfolio Margin |
Executive Summary
Effective August 1, 2008, the portfolio margin pilot program set forth in NASD Rule 2520(g) and Incorporated NYSE Rule 431(g)1 became permanent.2 In addition, effective August 1, 2008, NASD Rule 2520(g) and Incorporated NYSE Rule 431(g) were amended to codify certain FINRA interpretations related to concentrated equity positions and day trading.3
NASD Rule 2520(g) and Incorporated NYSE Rule 431(g), as amended, are set forth in Attachment A of this Notice.
Questions regarding this Notice should be directed to:
Background & Discussion
Portfolio margin is a methodology that computes margin requirements for an account based on the greatest projected net loss of all positions in a product class or group, and uses computer modeling to perform risk analysis using multiple pricing scenarios. The pricing scenarios are designed to measure the theoretical loss of the positions, given changes in the underlying price and implied volatility inputs to the model. Accordingly, the margin required is based on the greatest loss that would be incurred in a portfolio if the value of its components move up or down by a predetermined amount.4
The portfolio margin program set forth in NASD Rule 2520(g) and Incorporated NYSE Rule 431(g) was initially established as a pilot and was scheduled to expire on July 31, 2008. Effective August 1, 2008, the portfolio margin program became permanent.5
In addition, FINRA has codified its interpretation of NASD Rule 2520(g) and Incorporated NYSE Rule 431(g) regarding (1) monitoring concentrated equity positions and (2) the timing of day trading margin calls.
Concentrated Equity Positions
FINRA has codified its interpretation regarding concentrated equity positions. NASD Rule 2520(g)(1) and Incorporated NYSE Rule 431(g)(1) outline various procedural guidelines that firms are required to meet in order to offer portfolio margin to customers. FINRA has issued interpretive guidance in its frequently asked questions, available on its Web site,6 regarding its expectation that, among other things, firms develop reports that identify a concentration of any individual security in both individual portfolio margin accounts and across all portfolio margin accounts. Firms are permitted to establish their own criteria as to what constitutes a concentrated position. FINRA expects that firms will impose a higher maintenance margin requirement on any identified concentrated positions.
Day Trading
FINRA has also codified its interpretation regarding timing of day trade margin calls. NASD Rule 2520(g)(13) and Incorporated NYSE Rule 431(g)(13) require firms to monitor accounts that do not maintain $5 million minimum equity to ensure that day trading requirements promulgated under NASD Rule 2520(e)(8)(B) and Incorporated NYSE Rule 431(e)(8)(B) are applied. Customers are permitted to engage in day trading provided they day trade within a specific dollar limit (i.e., day trading buying power). Customers that day trade in excess of their day trading buying power are required to deposit additional funds and/or securities to meet this special maintenance margin deficiency, or day trade margin call. In a strategy-based margin account, day trade margin calls are due within five business days.7 Since maintenance margin deficiencies in portfolio margin accounts are due within three business days,8 FINRA requires day trade margin calls incurred in portfolio margin accounts also to be met within three business days.9
1 The current FINRA rulebook consists of two sets of rules: (1) NASD Rules and (2) rules incorporated from NYSE (Incorporated NYSE Rules). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to members of both FINRA and the NYSE, referred to as Dual Members.
2See Securities Exchange Act Release No. 58251 (July 30, 2008) 73 FR 45506 (August 5, 2008) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2008-041).
3See Securities Exchange Act Release No. 58236 (July 30, 2008) 73 FR 46111 (August 7, 2008) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2008-042).
4See NASD NTM 07-11 (February 2007) for additional discussion about the portfolio margin program.
5See Securities Exchange Act Release No. 58251 (July 30, 2008) 73 FR 45506 (August 5, 2008) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2008-041).
6See FINRA's frequently asked questions at www.finra.org/portfoliomargin/faq under "Margin Requirements."
7See NASD Rule 2520(f)(8)(C) and Incorporated NYSE Rule 431(f)(8)(C).
8See NASD Rule 2520(g)(10(A) and Incorporated NYSE Rule 431(g)(10)(A).
9See FINRA's frequently asked questions at www.finra.org/portfoliomargin/faq under "Day Trading."
Attachment A
New language is underlined; deletions are in brackets.
* * * * *
* * * * *
As an alternative to the "strategy-based" margin requirements set forth in paragraphs (a) through (f) of this Rule, members may elect to apply the portfolio margin requirements set forth in this paragraph (g) to all margin equity securities,1 listed options, security futures products (as defined in Section 3(a)(56) of the Exchange Act), unlisted derivatives, warrants, index warrants and related instruments, provided that the requirements of paragraph (g)(6)(B)(i) of this Rule are met.
In addition, a member, provided that it is a Futures Commission Merchant ("FCM") and is either a clearing member of a futures clearing organization or has an affiliate that is a clearing member of a futures clearing organization, is permitted under this paragraph (g) to combine an eligible participant's related instruments as defined in paragraph (g)(2)(D), with listed index options, unlisted derivatives, options on exchange traded funds ("ETF"), index warrants and underlying instruments and compute a margin requirement for such combined products on a portfolio margin basis.
The portfolio margin provisions of this Rule shall not apply to Individual Retirement Accounts ("IRAs").
1 For purposes of this paragraph (g) of the Rule, the term "margin equity security" utilizes the definition at Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System.
* * * * *
Rule 431. Margin Requirements
As an alternative to the "strategy-based" margin requirements set forth in sections (a) through (f) of this Rule, members organizations may elect to apply the portfolio margin requirements set forth in this section (g) to all margin equity securities,1 listed options, unlisted derivatives, and security futures products (as defined in Section 3(a)(56) of the Securities Exchange Act of 1934 (the "Exchange Act")), provided that the requirements of section (g)(6)(B)(1) of this Rule are met.
In addition, a member organization, provided that it is a Futures Commission Merchant ("FCM") and is either a clearing member of a futures clearing organization or has an affiliate that is a clearing member of a futures clearing organization, is permitted under this section (g) to combine an eligible participant's related instruments as defined in section (g)(2)(E), with listed index options, options on exchange traded funds ("ETF"), index warrants and underlying instruments and compute a margin requirement for such combined products on a portfolio margin basis.
The portfolio margin provisions of this Rule shall not apply to Individual Retirement Accounts ("IRAs").
1 For purposes of this section (g) of the Rule, the term "margin equity security" utilizes the definition at Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System, excluding a nonequity security.
* * * * *