Let's Talk About: Portfolio Margining - The Battle For Margin

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...Continued From Part One.

The Battle For Margin
But that all began to change in 2002. Tiredof being hamstrung by strategy-based margin, the CBOE spearheaded aneffort to revamp the options margin system.

On the surface, the changes that the CBOE hoped to implement wereshockingly simple. The new system would utilize a realistic analysis of risk exposure instead of relying on outdated formulas and setminimums to calculate margin requirements. The revisedsystem would also take into account any offsetting positions that may existin the account.



If It's Good Enough For Futures Traders...
These changes are not only straightforward, they would also bring theoptions margin system in-line with the futures margin system. Futures Commission Merchants have been able to take advantage of portfolio margining since 1988, a fact that has engendered no small amount of envy among options traders.

By finally implementing portfolio margining in the options market, it would eliminate a disparity that has long been an impediment to cross-product trading.

Overcoming The SEC
Unfortunately, as with any promising new development in the optionsindustry, regulation quickly got in the way of progress. Despite theseemingly obvious benefits of portfolio margining, the SEC simplyrefused to act on the initial proposals.

This refusal may seem baffling tothose unfamiliar with the financial oversight process. However, delay is actually atime-honored tactic of the SEC. When confronted with a decision that has far-reaching consequences for the marketplace, the Commission will often drag out the approval process to allow market forces to determine the outcome. Given the enormous potential ramifications of portfolio margining, the SEC was characteristically reluctant to issue a ruling.

The Pilot
Ittook a great deal of prodding before the SEC finally realized thepotential benefits of portfolio margining. The first glimmer of hope came in July 2005 when the SEC approved a pilot program for theportfolio margining of index options. This pilot was expanded in July 2006 toinclude equity options and single stock futures.

The early phases of the pilot were so successful that the SECauthorized an expanded program of portfolio margining for customeraccounts. This latest phase began in April 2007 and includes stocks,OTC derivatives and ETFs along with index options, equity options and single stock futures.

Continued In "What Does PM Mean For You?"...
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