FINRA published a 2022 report on their Examination and Risk Monitoring Program, in which, for the first time, they included a section on Portfolio Margin.
Portfolio Margin is calculated using the OCC’s TIMS methodology, which has proven to be inadequate for dealing with idiosyncratic risk, extreme volatility moves and concentrated portfolios.
At STT we believe by including this section on Portfolio Margin and focusing on improvement of practices around the portfolio monitoring process, FINRA continues to recognize the shortcomings of the TIMS models, for which we commend the agency. The shortcomings necessitate clearing brokers to augment or supplement the TIMS model or replace it with some other risk-based model for their PM calculations.
In the report FINRA also highlights the need for better real time portfolio margin systems and the need for stress testing along with ability to increase margin requirements in real time. They explicitly state the need to calculate liquidity, concentration and volatility risk in portfolio margin accounts and assess higher requirements as needed.
We believe that this report suggests that the risk and margin departments of clearing brokers will need to evolve their technology to assess risk across many factors and monitor risk in real time. The message from FINRA is clear – portfolio margin requirements must be informed by sophisticated risk analytics. At Sterling Trading Tech we have always held the view that risk and margin are “two sides of the same coin” and the Sterling Risk and Margin System enables clearing brokers to monitor risk and margin in real time as well as build sophisticated house policies using a variety of risk factors like stress tests, concentration, liquidity, Vega and VaR, to name a few, either as addons to TIMS or as a custom stand-alone risk methodology.