Strategy vs risk in margining portfolios of options

Abstract

The strategy-based approach to portfolio margining has been used for margining customer accounts for more than four decades. The risk-based approach was proposed in the mid eighties for margining some inventory accounts of brokers but permitted for margining customer accounts only in 2005. This paper presents a computational experiment with the strategy-based approach and the risk-based approach with the purpose of clarifying which one yields lower margin requirements under different scenarios. There exists a widespread opinion, cf. (Reuters 2007; Longo 2007; Smith 2008), that the risk-based approach is always a winner in this competition, and therefore the strategy-based approach must be disqualified as outdated. However, the results of our experiment with portfolios of stock options show that, in many practical situations, the strategy-based approach yields substantially lower margin requirements in comparison with the risk-based approach.