Portfolio Margining, Risk and Liquidity

Finadium Research Report

Portfolio Margining, Risk and Liquidity

Finadium
August 2007

The US has been several years behind Europe in implementing portfolio margining. During that time, prime brokers have been active in setting up enhanced leverage accounts overseas, and hedge funds themselves have seen the benefit of a London-based trading account for heavily margined activities. By implementing portfolio margining, the US takes a small step in attempting to both repatriate lost account balances and to keep new ones from flowing overseas. US-based hedge funds should be interested in US portfolio margining because of the reduction in record keeping that is offered.

Vodia Group analysis estimates that by implementing portfolio margining, the US will retain an additional 9% in account balances by 2010. In that year, hedge funds will manage US$4.6 trillion in account balances; the US will retain 63% of this volume, compared with 27% for Europe and 10% for Asia. (see Exhibit 1).

The US portfolio margining system, similar to the European one, is based on a single market model, TIMS, developed by the Options Clearing Corporation. While TIMS appears to be effective, the concern with any one model operating as the sole framework for risk management is if that model ever fails, all market participants will be wrong in their trades at the same time.

This report is 19 pages with 7 exhibits and 2 tables.

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TABLE OF CONTENTS
■ Executive Summary
– Key Point Summary
■ The US Catches Up to Portfolio Margining
■ Understanding Porfolio Margining
– Model Mechanics: TIMS and STANS
– Implementing Portfolio Margining
■ Margin, Liquidity and Risk
– The NYSE and Debt Margin Data
■ The Long Term Impacts of Portfolio Margining
■ About the Author
■ About Finadium