Saturday, February 17, 2007

The New World of Portfolio Margining

Another article in the most recent Futures Industry magazine on new margining rules for the NYSE and CBOE that are intended to come online on April 2 also caught my attention because of its likely impact on the prime brokers and hedge funds, which we've mentioned before in a previous post, as well as on the portfolio management and credit risk management systems we build for our clients.

Specifically, NYSE Rule 431 and CBOE Rule 12.4 which focus on cash equity, listed and OTC equity derivatives should reduce client margin requirements and increase leverage. It does sound like there are some limits imposed, including a $5 MM floor on margin equity before allowing the incorporation of OTC derivatives, and a credit ceiling on 10 times regulatory capital.

It's also very interesting to note that besides the impact on portfolio management and margining, these new rules impose more explicit credit risk management processes and controls.

One thing that Michael Jamroz, the author, does mention though is that true cross-margining for equities and futures is not an option yet because of the Commodity Exchange Act's segregation rules for futures margin, although he does note that the CFTC may at some point be in a position to change that.