Portfolio Margin Accounts

For serious investors

There are two types of margin accounts that stock investors can use. The first is the standard margin account that most stock investors use and is known as a “Regulation-T margin account” as discussed in the article the margin leading process. With this account type, the initial loan to settle the stock purchase is governed by the Federal Reserve Banks Regulation-T and the ongoing margin requirements are governed by Financial Industry Regulatory Authority FINRA Rule 4210.

The second account type is known as a “Portfolio margin account” and is the focus of this article.

Portfolio margin is not regulated by the Feds Regulation-T or FINRA and this can allow stock investors to buy stocks on margin with lower initial and maintenance margin requirements. The rules governing portfolio margin are self regulated by the broker under U.S. Securities and Exchange Commission (SEC) approved rules.

With a portfolio margin account, the broker calculates the risk profile of all the stocks held in a portfolio to ascertain what level of margin to apply to the portfolio.

Unlike Reg-T accounts, Portfolio margin accounts calculate

the individual risk for each stock in the portfolio

Unlike the Regulation-T margin account which has a fixed percentage for the initial and maintenance margin requirements, the portfolio margin account has variable initial and maintenance margin requirements which are determined by the balance and proportion of the stocks held in the portfolio.

Balance refers to the number of stocks and their position value. Essentially the more balanced the portfolio is, the lower the margin requirements will be. A portfolio with 20 stocks of similar position value and risk will have a lower margin requirement than a portfolio of only 2 stocks. A portfolio with 20 stocks which includes a couple of stocks with very large position values will have a higher margin requirement than a portfolio with 20 stocks of similar position value.

The risk profile of an investor’s portfolio of stocks is accessed by the broker using a risk based pricing model that calculates the largest potential loss of all positions held. The volatility of each stock in the portfolio is compared to the markets volatility. Portfolios that have position sizes which are substantially and disproportionately larger than other positions in the portfolio, will have an adverse effect on the risk profile. The risk profile that provides the worst case loss is used to determine the margin requirements.

Investing on Margin - Portfolio Margin Accounts; picture of a man pushing a sign on a button that says risk management in large capital letters

The portfolio margin approach determines the risk of loss of each stock rather than simply using a fixed percentage for all stocks as the Regulation-T and FINRA rules use.

The minimum margin requirement is generally 15% for both the initial and maintenance margin.

Portfolio margin accounts provide increased leverage for balanced portfolios, but are generally not suitable for accounts that hold large proportions of only a few stocks as the margin requirements tend to be higher than the FINRA margin of 25%.

The portfolio margin account requires a minimum account value of US$100,000 and therefore restricts this account type to larger portfolios. For investors with portfolios over US$100,000, a portfolio margin account has the benefit of providing some extra cushioning in terms of receiving a margin call due to the lower maintenance margin requirements for a balanced portfolio.

Stock investors who favor portfolio margin over the Regulation-T margin accounts tend to be active investors would are continually buying and selling stocks to adjust their portfolio. Since they are actively monitoring their portfolio, the lower margin requirements allow them to amplify their gains without any unnecessary risks from the higher leverage.

The portfolio margin account does need to be monitored more closely than a Regulation-T margin account. If the portfolio value drops below $100,000, brokers may enforce the FINRA maintenance margining requirements which may trigger a margin call due to the generally higher FINRA margin requirement of 25%.

For experienced investors with account balances well over US$100,000, the portfolio margin account gives them another option to consider.