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Cross Margin

  1. 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. 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. Are you sure about the self-clearing part? I believe the BD part, but self clearing?
     
  4. 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. 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:
    http://www.optionsclearing.com/risk-management/margins/cross-margin-eligible.jsp

    http://www.optionsclearing.com/risk-management/margins/cross-margins.jsp

    Participation

    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.
    Margins

    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.
    Operational

    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.
    Summary

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

    What do you suppose they are referring to here:

    "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."

    And has this issue been resolved? Because I was under the impression that one can trade futures and securities within a single pm account these days.
     
  11. You can trade futures in a portfolio margin account. You just don't get the cross margin relief on the options on futures. Doubt that will ever happen.
     

  12. Sorry Mav, you can't trade futures in a customer portfolio margin account. Futures have to be traded in a segregated futures account. It's a requirement by the CFTC and the futures exchanges. If you trade both, and your prime broker give you correct document to sign, they can seamlessly move money back and forth to meet margin requirements, however, the CPM account must maintain a value of at least $100K at the close everyday, or you can lose CPM, even if you have cash in the futures account.
     
  13. Really? I didn't know that. I thought since the portfolio management account was segregated, that you could trade them, you just have to post full exchange margin.

    I think IB let's you trade them but it swaps the money out of the cash securities account over to the futures account when margin needs to be posted. I may be wrong on that as well.
     
  14. The CPM account is segregated from other customer accounts, not from the firm. Because it's a margin account, securities are held in street name. That's why SIPC is important. Each master account is not commingled with other traders from other master accounts. But, if you put together a trading group with one master and sub-accounts, those traders can put the other traders at risk.

    IB and other firms, we do it at Penson, allow the funds to be moved back and forth as needed. But, each account must have enough in assets to cover CPM in the securities account, and exchange margin in the futures account.
     
  15. rmorse, what about Single Stock Futures in a pm account?

    Are SSF's margined based on class groups within a cpm account at your firm or are these products margined separately from their class?
     
  16. I'm not sure. I know very little about them. Go to https://cpm.theocc.com/tims_online.htm. If it's on the list, enter a position and you'll see the haircut on that position. If it's not on the list, it's most likely not included in CPM.
     
  17. Thanks. I checked the list. It's helpful information. You have to go through here first, http://www.theocc.com/risk-management/cpm/, to get there.
     
  18. Eligible positions for a pm account are listed on the main page:

    "Positions eligible for a portfolio margining account include margin equity securities (including foreign equity securities and options on foreign equity securities provided the foreign equity is deemed to have a “ready market” under SEC Rule 15c3-1), listed options on an equity security or index of equity securities, security futures products, unlisted derivatives on an equity security or index of equity securities, warrants on an equity security or index of equity securities, broad-based index futures, and options on broad-based index futures."
     
  19. rmorse, does your firm allow foreign currency positions in a pm account? If so, how do you handle the margin for the forex portion?
     
  20. No. FX is not a security, it's a cash swap of currencies. In the US you can get around 50-1 at some banks. Over seas in the UK I've heard of traders get up to 200 to 1. Crazy. Futures on FX and options on the futures are futures products.

    I don't do much FX right now. We concentrate on equites/options and futures and options on futures.
     
  21. By the way, a statement on the OneChicago site confirms that SSF's are not eligible for portfolio margining.

    "Portfolio-based margining (e.g. SPAN margining) is not yet permitted for customer positions in security futures. Firms will nonetheless continue to receive SPAN files that reflect the appropriate minimum margin requirements."

    http://www.onechicago.com/?page_id=119