Cross Margin

Discussion in 'Options' started by nitro, Dec 19, 2011.

  1. nitro


    Do you have to be a:

    1) Broker Dealer
    2) Be a market maker
    3) Something else

    in order to be able to get cross margin? So for example, say I buy 1 ES 1200 strike put, and I sell 5 120 strike SPY options, at what firms can I get cross margining for that if I am not 1 or 2? Can it be done without being 1 + 2?
  2. rmorse

    rmorse Sponsor

    You need to be a self clearing broker dealer.

    "Is STANS now approved for portfolio margining use?
    No, STANS is only used at the clearing level for self-clearing OCC member firms. TIMS is the approved methodology for portfolio margining and for broker-dealer net capital requirements under SEA Rule 15c3-1."
  3. nitro


    Are you sure about the self-clearing part? I believe the BD part, but self clearing?
  4. rmorse

    rmorse Sponsor

    yes, currently even for market makers and other broker dealers, futures accounts are segregted and have their own margin requirements from a different regulator. The sec and CFTC would have to get together and agree on details.

    "Futures positions are permitted to be included in the portfolio margin account for the purpose of determining the margin requirements of product groups. Would the customer still be expected to meet any futures margin requirement as determined by the futures exchange?
    The margin requirement is calculated on the combined futures and securities position and could be lower than the margin required by the futures exchange. However, until segregation issues between the SEC and the CFTC are resolved, the ability to combine securities and futures products into a single portfolio margin account will be unavailable."
  5. Maverick74


    Bob, this is just arguing semantics though right? Any JBO in the country will internally cross margin futures and options positions even if on the traders sheets it's not accounted that way.
  6. 1) Broker Dealer
    2) Be a market maker
    3) JBO

    Also cross margin is limited to OCC' eligible products list:


    Cross margining was designed for firms with memberships across various clearing organizations which guarantee products that are highly correlated. Due to differences in securities and futures related customer protection requirements, the program is only open to clearing members and their affiliates, and market professionals who include market makers and futures locals.

    In order to facilitate the cross-margin process, participating clearinghouses establish joint clearing accounts for each member. In the event of a default, the clearinghouses' arrangement provides for the treatment of all assets and obligations associated with the cross-margin account as well as the other clearing accounts of the defaulting member.

    Clearing level margins are computed based on the combined positions maintained in the cross-margin accounts using OCC's proprietary System for Theoretical Analysis and Numerical Simulations (STANS). STANS is a portfolio-based margin methodology that utilizes a sophisticated options pricing model to identify the economic risk inherent in a portfolio. By combining hedged positions cleared at separate clearinghouses into a single portfolio for margin and settlement purposes, the real risk of that portfolio can be determined. This results in a more appropriate margin requirement, which is typically lower than if margins were calculated separately. The average daily margin savings realized by firms participating in cross margining have been significant.

    Cross margin trades are executed on the exchanges for which the participants clearing organization clear trades and typically are transferred to a joint account via Clearing Member Trade Agreement (CMTA) or give-ups. At the end of each trading day, the futures clearinghouses transmit closing positions and settlement activity to OCC, which in turn calculates clearing level margining and then produces and distributes position, margin and settlement reports to clearing members.

    Cross margining has proven to be a viable tool for participating firms, allowing them to enhance the efficiency and the ability in meeting their financial obligations to the marketplace. This is especially important during periods of increasing market volatility. By recognizing intermarket hedged positions cleared by different clearing organizations, cross margining increases the overall efficiency of the clearing and settlement process, providing reduced initial margin requirements as well as increased liquidity in the form of net settlements.
  7. rmorse

    rmorse Sponsor

    I'm not sure if the JBO arrangement allows the self clearing OCC member to pass on that right to their JBO partner. You would know better than me. Does your firm allow the extra leverage from cross margining? If yes, is it because of the reduced risk, or the ability to cross margin?Will it create a larger internal net capital requirement because part of the position is at ML PRo and part at ML Futures?
  8. Maverick74


    It's because of the cross margin. Market makers could not be in business if they could not trade SPX against ES and SPY options.

    When portfolio margin came out, this was one of the limitations I heard of PMA accounts.
  9. Options12

    Options12 Guest

    rmorse, where does the quote you cite come from? Do you have a link? Thanks.
  10. rmorse

    rmorse Sponsor

    #10     Dec 29, 2011