(5) The day trading restrictions promulgated under Rule 12.3(j) shall not apply to portfolio margin accounts that establish and maintain at least five million dollars inequity, provided a member organization has the ability to monitor the intra-day risk associated with day trading. Portfolio margin accounts that do not establish and maintain at least five million dollars in equity will be subject to the day trading restrictions under Rule 12.3(j), provided the member organization has the ability to apply the applicable day trading restrictions under that Rule. However, if the position or positions day traded were part of a hedge strategy, the day trading restrictions will not apply. A "hedge strategy" for the purpose of this rule means a transaction or a series of transactions that reduces or offsets a material portion of the risk in a portfolio. Member organizations are also expected to monitor these portfolio margin accounts to detect and prevent circumvention of the day trading requirements. So what do the day trading rules under 12.3(j) say?
"Perhaps my broker will have a way to separate your account into two margin type accounts; one using portfolio margin and one using Day trading rules simply transferring $$$ back and forth." Brokers already do this. Each day two #'s are calculated: daytrading buying power and overnight buying power. There's no need to literally transfer $ because it's the same acct. Mskl- I agree with your broker's interpretation, and I would add that this is not a difficult change to implement. It's simply a slight variation of an accounting method which is already in place.
STOCK TALK: New Margin Rules for Stock Traders By Frederic Ruffy, Optionetics.com Published: January 22, 2007 9:30 PM EST The great stock market crash of 1929 was blamed on rampant speculation, excessive leverage, and inadequate regulatory oversight. The debacle caused a wave of bank and brokerage failures that devastated the US financial system. Investors were left reeling. In order to restore confidence in the securities markets, the Federal government took several steps, including creating the Securities and Exchange Act of 1934, separating the banking and securities industry, and giving the Federal Reserve Board the authority to set margin requirements, which it subsequently did through Regulation T [Reg T]. Now, almost 80 years after the crash, major changes to Reg T are underway. Prior to the stock market crash of 1929, there was no limit on how much investors could borrow using shares. That, in turn, fueled a stock market bubble, as investors put up very little very capital but took on large positions of stocks at inflated prices. Today, Federal Reserve rules establish a limit to how much investors can borrow to buy securities. These rules are embodied under Reg T, which requires an initial deposit of $2,000 or more for a margin account, and, initially, 50% or more in cash or eligible securities for buying stock on margin securities. For example, an investor borrowing on margin to buy $10,000 worth of stock is required to put up 50% collateral, or $5,000. In the options world, the margin requirements are based on formulas for various strategies. Puts and calls that are bought (or long options) are paid for in full. To sell options, traders must put up 100% of the option proceeds and then a percentage of the value of the stock or index. Various spreads require a certain minimum margin that can vary from one strategy to the next. A straddle or strangle, which involves buying both puts and calls, requires the investor to pay for 100% of the cost of the options. Critics of the current margin rules have argued that the current system does not create margin risk requirements that accurately reflect the true risk associated with certain strategies. For example, the protective put is a low risk strategy that involves buying shares of stock and also buying a put option, which effectively caps the losses from an adverse move in the share price. Yet, today, Reg T requires investors pay 50% for the stock and 100% the cost of the put option. Therefore, the margin requirement for establishing a protective put is actually greater than the margin for long stock, even though the risk from holding stock with a put is much less. Under new rules that the Securities and Exchange Commission [SEC] approved in December and that go into effect on April 2, 2007, risk-based rather than strategy-based methodologies will be used to compute margin for some investors. The new formulas will more accurately gauge an investorâs risk by putting all of the positions in the same underlying stock in one portfolio and then stress-testing that portfolio for a potential (15%) move higher or lower in the stock. For instance, under the new rules, the margin is equal to the stock price plus the put option premium, minus the strike price of the put (the protection). The Chicago Board Options Exchange [CBOE] offers the following before and after example of the margin used on a stock and put position. Position Long 500 IBM shares @ $91.25 Long 5 Puts IBM April 90 @ $2.50 a contact Strategy-Based Margin (50% for stock and 100% for put) $24,062.50 Portfolio Margin (Stock price minus strike plus put price x 500) $1,875.00 The margin drops from $24,062.50 to $1,875.00! (For more examples and further information, please visit cboe.com/Institutional/Margin.aspx.) While portfolio-margining will greatly reduce the capital required for certain positions such as protective puts, it also repeals Reg T on owning straight equities. This was somewhat of an unexpected outcome. Regardless, rather than putting up 50% margin for buying shares, the requirement drops to 15% (because the position is stress tested for a 15% move higher or lower in the stock.) Consequently, an investor can control $10,000 of stock with only $1,500! Now, some critics might argue that Regulation T, which was the direct result of the market crash of 1929, is now null and void. In addition, the new rules could come into effect when margin debt is already quite high. According to a January 2, 2007 update in The Wall Street Journal, âA rising stock market encouraged investors to go into debt to trade stocks, leading to an increase in the level of so-called margin debt in 2006... That 22% increase left margin debt not far from the record of $278.53 billion, reached in March 2000 as the Nasdaq Composite Index was setting a record high.â Margin is already reaching the highs last seen during our most recent period of irrational exuberance in the stock marketâthe high technology bubble of 2000. So, is this a good time to repeal Reg T? Fortunately (or unfortunately, depending on what side of the fence youâre on), portfolio-margining will not be available to all investors. Doug Engmann, Managing Director of Equities for Fimat USA, LLC, explains that only firms that have the ârisk cultureâ to allow investors to actively trade options and use margin are preparing for the forthcoming changes. His firm has been an instrumental part of a three-phase pilot program that convinced regulators to embrace the new rules. Moreover, Engmann explains that many firms do not have the tools for risk management or the existing technology to provide portfolio-margining. However, firms like Fimat USA have the experience and the technology due to the fact that the firm has cleared for market makers, which have used similar formulas to compute margin levels in the past. In addition, while the margin on stock purchases will come down, the new margin rules will encourage hedging, according to Engmann, which will serve to reduce risk. Now that the rules have been approved, a couple of dozen firms are expected to join the fray. Prime brokers, or firms that deal mainly with institutional investors and other professionals, will be among the first to offer portfolio-margining. These firms stand to make a lot of money, not only by freeing up capital for their hedge fund clients, but also by generating additional revenues from margin interest and increasing trading activity. Options brokers such as ThinkorSwim and OptionXpress are also expected to offer the new margin requirements. Fimat USA, LLC is the only firm currently offering these new margin levels [on certain products including broad-based indices and corresponding ETFs] to investors. However, the firm reviews customers on a case-by-case basis and requires a minimum account balance of $150,000 as well as Level 5 options approval, which includes approval to trade uncovered index option writing. Other firms will have their own rules and guidelines for allowing portfolio margining. In conclusion, while risk-based requirements represent some of the most significant changes in margin regulation since the Great Depression, the process is not like flipping a switch and then, all of a sudden, all investors will have portfolio-margining available. For many stock investors, the changes will not be a factor at all. Many do not trade on margin and have sufficient equity already. They donât need any more leverage. However, for short-term stock traders the added leverage can make big difference on profit and loss results. In addition, portfolio margin requirements will extend well beyond listed equities, but also include equity and equity options strategies; broad based index options; exchange-traded funds [ETF] and ETF options; and, perhaps one day, futures and futures options. However, due to time and space constraints, portfolio margining on those other products will be topics of discussion for a later time.
http://www.cboe.com/aboutcboe/special/marginexamples.pdf The following are examples of various strategies of customer margin using the current strategy methodology and the proposed portfolio methodology (a/o close of 12-1-06). Note that the strategy methodology uses a 20% market move while the portfolio methodology uses a 15% market move. Computation detail is available upon request. Contact James Adams, (312) 786-7718, in the CBOEâs Department of Member Firm Regulation. COVERED WRITE Position Long 500 IBM @ $91.25 Short 5 calls IBM APR 95 @ $ 2.78 Strategy margin is 50% of stock less the short option premium or $21,422.50 Portfolio margin requirement is $5,504.00 PROTECTIVE PUT Position Long 500 IBM @ $91.25 Long 5 puts IBM APR 90 @ $ 2.50 Strategy margin is 50% of stock plus full payment for put or $24,062.50 Portfolio margin requirement is $1,878.00 DEBIT SPREAD Position Long 50 calls IBM APR 90 @ $5.45 Short 50 calls IBM APR 100 @ $ 1.16 Strategy margin requires full payment or $21,450.00 Portfolio margin requirement is $19,089.00 NON-CONFORMING DEBIT SPREAD (Long must expire on or after short) Position Long 50 calls IBM APR 90 @ $5.45 Short 50 calls IBM JUL 100 @ $2.28 Strategy margin requires full payment for long option and appropriate margin on short option position or $74,750.00 Portfolio margin requirement is $14,106.00
US exchanges prepare for gains from multi-asset overhaul Isabelle Clary 10 Jan 2007 Exchanges and brokers in the US are expecting to profit from a change in trading rules that should boost volumes and increase the attraction of multi-asset execution platforms. From April 2, brokers will be able to use overall portfolio exposure to set customer margins â the amount that can be borrowed from a broker to finance market positions â instead of maintaining separate margin accounts for each asset class a customer holds. It should reduce borrowing costs and allow US markets to better compete against their European peers, which have long operated under a portfolio margining regime. Douglas Engmann, managing director for equities in North America at Fimat, a securities broker owned by Société Générale, said: âThis is going to have a tremendous impact on the market. The retail business will increase substantially, bringing onshore a lot of business that is financed offshore. It will allow US exchanges to be more competitive. "This will give customers the ability to carry positions with much less equity. Itâs the biggest change in Regulation T in 40 years.â The Federal Reserve Boardâs Regulation T governs the amount of credit brokerage firms can extend to customers to purchase securities. Customers may borrow up to 50% of their stock portfolio on initial margin and 25% thereafter under the maintenance margin guidance. These requirements will decrease substantially because holding assets within a diversified strategy reduces overall exposure and margin requirements. The largest US stock and options markets, the New York Stock Exchange and the Chicago Board Options Exchange, have been lobbying the Securities and Exchange Commission to change the requirements. William Brodsky, chairman of CBOE, said the reform âmakes the US equity markets more competitive in a world where the lines continue to blur between product classes, where cross-border trading is common and where capital moves quickly to the most efficient market. True risk-based margining frees up a tremendous amount of capitalâ. Randy Frederick, director of derivatives trading at investment firm Charles Schwab, expects the regulation to help investors avoid the losses incurred after the bursting of the internet bubble by encouraging more hedging of risky positions. He said: âMulti-asset trading is a great way to reduce risk. It helps you become more insulated against an adverse move in any asset segment. Anyone who lived through the last downturn took a loss of up to 70%. If they had used options as a hedge, they could have protected the majority of those losses.â Brokers use real-time risk-management systems to monitor clientsâ exposure, and Frederick sees no reason why this type of technology should not be made available to investors. He said: âRetail investors are becoming more sophisticated and better educated, thanks to the internet, seminars and reading material. Someone could create a customer version of these tools.â With investors being encouraged to take a more holistic view of their portfolios, they will also expect to be able to trade multiple asset classes from a single screen. Michael Plunkett, president at agency broker Instinet, said: âThe front-end game is going to be about efficiencies. Whether it is connecting 30 venues or five asset classes, the buyside trader does not want 15 different front-ends on his or her desk.
Revised margin debt rules: Don't try this at home Published January 9, 2007 During last fall's stock market rally, investors took on a greater amount of debt as they paid to play. This year, a historic change in the process of borrowing to invest will unfold for investors deemed by their brokers to be sophisticated enough to use more flexible margin debt rules adopted last month by the Securities and Exchange Commission. The number of individuals likely to participate initially in the new rules is small. But the change in thinking on the part of regulators and the potential increase in investment-related debt are huge. Currently, federal regulations limit the amount an investor may borrow to 50 percent of the purchase price of stock. If you purchase an option to buy stock, your cash requirement, in relation to the stock price, will be significantly less. The borrowing limits on stocks and options are imposed separately. In December, the SEC authorized the Chicago Board Options Exchange and the New York Stock Exchange to permit margin requirements based on a multiproduct portfolio of equities and options on stocks, stock indexes and stock index futures. The new rule is called portfolio margining. "This is the biggest change in the way securities margining works in 50 years," said William Brodsky, CBOE chief executive. "The whole name of the game here is you can make better use of your capital without increasing your risk." In a calculation provided by the CBOE, an investor buys 500 shares of International Business Machines at $91.25 a share. To hedge the IBM bet, the investor buys five put options, each representing a right to sell 100 IBM shares, for $2.50 a share. The cash requirement under current rules would be $24,062.50, or half the equity purchase plus the payment for put options on 500 IBM shares. Taking into account the fact that a portfolio comprising an equal amount of IBM stock and IBM put options is less risky than buying IBM shares outright or buying IBM put options separately, the new cash collateral would be just $1,878. "You usually pay margin twice: You pay margin on your stock and you pay margin on your put," said Douglas Engmann, managing director of equities in North America for Fimat Group. Under the new rules, "if you hedge your stock with options, you will be able to get the margin benefit of reducing your risk." Under certain circumstances options contracts could expire and leave the customer with a greatly reduced margin on his or her stock holdings, Engmann said. On the other hand, "the customer has to understand that you can lose more money than the money you put up. It's the responsibility of the brokerage to monitor the risk" to the firm and the customer, he said. A cross-product evaluation of total risk in a customer's securities account is long overdue, said Ned Bennett, chief executive of OptionsXpress, an online broker. "We need to have all these products looked at with the same set of eyes," he said. "It doesn't suit all retail investors, but for more savvy options traders, it's a more realistic and fair set of margining rules," said Danny Rosenthal, co-CEO of OptionsHouse, an online broker that launched its service this week in Chicago. On the other hand, "I don't think a junior options investor would want to do this, and we certainly wouldn't approve them to do it," he said.
With the new margin rule, is it true that a brokerage firm cannot charge you margin interest the way it is now? For example, I have 100K, and I buy stocks valued at 200K. Can they charge me interst based on the new rule? The brokerage firms might lose a lot of revenue if not. Time to short discount brokerage firms?
You will be able to buy more stock as the marginable amount drops from 50% to 15%. They will be charging interest.
that would be a neat trick! If your settled cash balance is negative - you will pay interest period. Do you actually expect something else?