Portfolio Margining James Barry, Executive Director Collateral and Margin Services

Regulatory Issues

Guidelines  Regulation T Reg T margin requirements will not apply to Portfolio Margin account; maintenance margin requirements only; will not eliminate other provisions of Reg T  Customer Eligibility Minimum equity requirements will be $100k for Registered Investment Advisors and $500k for all others  Day Trading NYSE Rule 431 guidelines apply  Re-hypothecation Re-hypothecation Rule 15c3-3 will apply; allows 140% of debit balance to be re- hypothecated  Short vs the Box No requirement for hedged portion of position

Guidelines (continued)  Equity Calculation Total Liquidating Equity, including option market value, will be applicable  Risk/ Valuation Model Variations Each B/D will be allowed to determine own schedule or model based margin policies; customers still required to meet regulatory margin minimum requirements  Foreign Currency Currency exposure will be addressed in the Portfolio Margin model

Customer Account Options  Portfolio Margin Account only All securities may be held in the Portfolio Margin account; NYSE Rule 431 will apply to all positions held not covered by the Portfolio Margin model  Portfolio Margin Account and Regulation T Account Customers may opt to have both a Portfolio Margin and a Reg T account within a single Broker Dealer or multiple Broker Dealers Clients will be responsible for designating which account the positions will be held Opting In/ Out of Portfolio Margin  No limit on number of security transfers between accounts, provided both accounts have sufficient excess after position is moved; movements to alleviate a deficit in one account from an account with excess are permitted

Customer Account Options (continued)  Guaranteed Accounts Minimum equity requirements as stipulated in NYSE Rule 431 will apply based on the sum of the equity in both the guarantor and guaranteed accounts.

Margin Calls  Failure to Meet Margin Calls If a client fails to meet a margin call within the 5 business day timeframe:  B/D will have option of forcing liquidation or hedging positions to alleviate the margin call  B/D will not be allowed to take capital charges in lieu of customer’s obligation to meet margin call  B/D will be required to apply for additional time from the NYSE; request should give a detailed explanation of why additional time is necessary

Margin Calls (continued)  Timing of Margin Calls Allowable time period for clients to meet portfolio margin call will be 5 days  Meeting Margin Calls Federal calls will require physical cash movements for Guaranteed Accounts and customers with both a Portfolio Margin and Reg T account Maintenance margin calls may be met via adjustment to cash available Cross margining with futures will not be allowed. As Security Futures are securities, they will be included in the Portfolio Margin account. Default treatment for securities held in a Portfolio Margin account but not calculated using portfolio margin schema will be governed by NYSE Rule 431

Pending Items  Foreign Currency Margin Treatment Currency exposure will be addressed in the Portfolio Margin model developed by the Risk Working Group  Control and Restricted Securities Determine whether Portfolio Margin model will accommodate securities with selling constraints  Stocks without Historical Data Determine whether Portfolio Margin model will include below types of securities:  Newly Issued Securities  Foreign Stocks  Smaller US Stocks

Margin Model

Models  Sampled various risk-based margin calculation approaches that consider risk parameters such as price, volatility, liquidity, etc.  Considering one of the following methods:  VaR based method relying on historical data  Stress Test method based on predefined scenarios  Proprietary Models requiring Regulatory approval  Each method has advantages over the current regime particularly with regard to risk reducing positions

Models  VaR  Advantage: Consistent across multiple asset classes  Disadvantage: Difficult to translate to a margin requirement  Stress Test  Advantage: Easy to translate to a margin requirement  Disadvantage: Assumptions about assets classes must be initially defined  Proprietary Models  Advantage: B/D can tailor margin requirements to specific businesses  Disadvantage: Added complexity to Regulatory oversight

Models  Elements of a Stress Test Model  Set a benchmark margin requirement on a one sided, diversified portfolio (e.g. 25%)  Set a benchmark margin requirement on a balanced long/short, diversified portfolio (e.g. 12.5% a side)  Reprice options using standard models for each scenario  Higher requirements on concentrated, illiquid portfolios  Lower requirements on long/short unbalanced portfolios  Add higher stress tests for  Volatile stocks  Lower rated convertible bonds  Less developed countries