Portfolio margin is a risk-based method for calculating margin across a group of eligible positions. A model evaluates how the portfolio could perform under specified market stresses and uses those results, together with applicable adjustments, to set requirements.
How combined risk is assessed
Stress scenarios may change underlying prices and option volatility. Recognized offsets between positions can reduce the modeled loss compared with assessing each leg separately. For example, an option hedge may offset some risk from another position, subject to the model's treatment of strikes, expiries and instruments.
Concentration, liquidity and other add-ons can increase requirements. The worst tested scenario is only the worst within the model's selected tests; it is not a ceiling on actual future losses. Eligible assets, scenario ranges and collateral valuation rules differ by platform.
What the margin benefit does not mean
Portfolio margin is distinct from simply sharing collateral through cross margin. Sharing funds does not necessarily mean a system recognizes portfolio hedges when calculating requirements. Some portfolio arrangements assess settlement-currency groups separately.
Lower requirements are not guaranteed. Removing a hedge can increase the remaining portfolio's margin even though fewer positions remain. Changes in prices, volatility or collateral value can also create a shortfall without a new trade. Liquidation rules still apply, and efficient use of collateral does not eliminate market risk.