What is Portfolio Margin?

Margin is often misunderstood as simply a way to borrow more money. In reality, margin is a risk framework or a set of rules that determines how much capital is required to support a portfolio under all market conditions, but focused on adverse market conditions. All customers on Frec automatically open accounts that are structured as Regulation T margin accounts. For those who want to invest in our 200/100 and 250/150 long short strategies, a portfolio margin account is required. There is a review process to upgrade any account to a Portfolio Margin type and you must be approved by our clearing firm before investing in these strategies.

How portfolio margin works

Portfolio margin was introduced in 2005 and recognized by regulators in 2008 as a way to evaluate risk at the portfolio level, rather than on a position-by-position basis. It calculates margin requirements by modeling how a portfolio might perform under a range of hypothetical stress scenarios, such as sharp market moves or sector-specific shocks. 

Rather than asking, “How risky is this position by itself?” Portfolio margin asks: “How risky is this portfolio as a whole under stress?” 

Key features of portfolio margin include: risk assessed across the entire portfolio, margin based on potential losses under modeled scenarios, and recognition of offsetting and correlated positions. The result is a margin requirement that more closely reflects the economic risk and not just notional exposure. 

When portfolio margin is most effective 

Portfolio margin tends to be most effective for portfolios that are: diversified across securities and sectors, hedged using long/short position, or designed with controlled net exposure. In these cases, portfolio margin may require less capital than traditional margin because the portfolio’s potential losses under stress are lower than what position-level rules would imply. 

Risks of Portfolio Margin

Portfolio margin does not eliminate risk nor does it guarantee lower margin requirements. Because it's designed for complex strategies, it allows for higher leverage and carries greater risk, with potential for significant losses, including losing more than invested, if markets move against you. It tends to be more risk-sensitive, especially with concentrated portfolios. Due to these risks, this type of account is only available to investors who meet higher eligibility requirements such as: minimum account equity thresholds, approval based on experience and risk understanding, and ongoing compliance with broker requirements. Additionally, there is a potential for a margin call which will typically be covered quickly and with little warning.