On December 12, 2006, The Securities and Exchange Commission (SEC) approved the rule changes proposed by the Chicago Board Options Exchange (CBOE) and the New York Stock Exchange (NYSE) which allow broker-dealers to use a risk-based portfolio approach for the margining of customer accounts. The rule change became effective on April 2, 2007.

This expansion of customer portfolio margining helps U.S. equities markets take a major leap forward by allowing securities firms to participate on a level playing field with the futures and international equities markets with respect to customer margining. Previous margin rules governing U.S. equity markets followed a strategy-based approach which required broker-dealers to identify approved hedged positions (or strategies) and imposed a set margin requirement for each position. Portfolio margining allows broker-dealers to group products based on the same underlying asset into portfolios. The margin requirement is then based on the risk of the portfolio as opposed to a set amount for each position.

This risk-based approach is based on OCC's TIMS margin methodology, which determines the maximum loss associated with a portfolio over a range of percentage moves in the underlying asset. A portfolio containing an underlying asset and an offsetting derivative position reflects less market risk and requires less equity to collateralize the account than the two positions considered separately. The reduction in required collateral provides more leverage to customers in the form of additional capital available for investment. A risk-based approach to collateral requirements has been the standard for U.S. futures and international securities markets for several years.

Investors wishing to learn more about the new customer portfolio margining rules, can find some useful tools and literature available at http://cpm.theocc.com.