Margin Required is the minimum amount of collateral that a client must post to maintain their current positions. This article discusses how Margin Required is calculated depending on the methodology chosen.
In Kooltra, Margin Required is calculated automatically based on an account's assigned Margin Group, and the Margin Rules contained within that group. See How to configure Margin Groups and Margin Rules for details on setting these up.
There are two methods that can be used for calculating a client's margin requirement: Margin by Currency Pair and Margin by Currency. Which method is used depends upon the Type specified on the Margin Rule.
Margin by Currency Pair
For Margin Rules with Type 'Currency Pair', margin is calculated as a percentage of the aggregate notional on open positions for the specified currency pair.
To calculate margin by currency pair we complete the following steps:
- Group all trades for an account by currency pair and get the net notional amounts
- For each currency pair, apply the appropriate Margin Rule requirement to the aggregated notional amount and convert this into the entity base currency
- Sum the margin requirements for each currency pair in the entity base currency
Note: positions are only aggregated on currency pair (not value date). This means the notional amounts of all open trades that have the same currency pair are grouped together, regardless of time to maturity (tenor).
Margin by Currency Pair does not differentiate between Spot and Forward positions.
Example
Let’s consider an example where we have the following currency pair rates:
|
CCY Pair |
Rate |
|
EURUSD |
1.15 |
|
USDCAD |
1.3 |
|
EURCAD |
1.495 |
In addition, we have an account with a base currency of CAD which has the following trades:
|
Trade Date |
Value Date |
Action |
CCY 1 |
Amt 1 |
Rate |
CCY 2 |
Amt 2 |
|
Today |
T+2 |
BUY |
EUR |
100,000 |
1.3 |
USD |
-130,000 |
|
Today |
T+2 |
SELL |
EUR |
-100,000 |
1.32 |
USD |
132,000 |
|
Today |
T+1 |
BUY |
USD |
150,000 |
1.34 |
CAD |
-201,000 |
|
Today |
T+2 |
BUY |
EUR |
200,000 |
1.52 |
CAD |
-304,000 |
|
Today |
T+30 |
BUY |
EUR |
200,000 |
1.52 |
CAD |
-304,000 |
|
T-2 |
T+30 |
BUY |
EUR |
100,000 |
1.52 |
CAD |
-152,000 |
|
T-1 |
T+30 |
SELL |
EUR |
-100,000 |
1.53 |
CAD |
153,000 |
|
Today |
T+5Y |
BUY |
USD |
200,000 |
1.34 |
CAD |
-268,000 |
These trades are aggregated into positions by their currency pair only:
|
CCY Pair |
Amt 1 |
Rate |
Amt 2 |
Entity Base Ccy Amt1 |
Entity Base Ccy Amt2 |
Max Absolute Entity Base Ccy |
|
EURUSD |
- |
- |
2,000 |
- |
2,600 |
2,600 |
|
USDCAD |
350,000 |
1.34 |
-468,000 |
455,000 |
-468,000 |
468,000 |
|
EURCAD |
400,000 |
1.52 |
-607,000 |
598,000 |
-607,000 |
607,000 |
Using the trades above as an example, let’s also assume the account has a Margin Group named "Gold" with a default spot requirement of 5 percent and the following margin rules:
- EURUSD Rule:
- Margin Group: Gold
- Currency Pair: EURUSD
- Margin Requirement: 2 percent
- Margin Type: Currency Pair
- Transaction Type: Spot
- USDCAD Rule:
- Margin Group: Gold
- Currency Pair: USDCAD
- Margin Requirement: 1 percent
- Margin Type: Currency Pair
- Transaction Type: Spot
Applying the margin rules to their associated open positions, we get the following margin requirement by currency pair. Since there is no margin rule for EURCAD, the default requirement of 5 percent from the group is applied giving:
- EURUSD Margin Requirement: 2,600 * 0.02 = 52 CAD
- USDCAD Margin Requirement: 468,000 * 0.01 = 4,680 CAD
- EURCAD Margin Requirement: 607,000 * 0.05 = 30,350 CAD
which gives Margin Requirement = 35,082 CAD
Margin by Currency
Margining by currency was built according to guidelines provided by the Investment Industry Regulatory Organization of Canada (IIROC). The documentation on the margin requirements of FX products can be viewed in Series 5000: Dealer Member Margin Rules where the margin requirements for FX contracts are described in rules 5460 to 5469.
Kooltra excludes trades that are settling today from the margin requirements when margining by currency.
For Margin Rules with Type 'Currency', margin is calculated according to the following steps:
- Calculate the spot margin requirement. Note: this is called spot requirement according to the naming convention in the IIROC documentation but it is actually calculated only on forward trades.
- Take all open positions and filter for only forward positions, aggregated by currency pair only.
- Consider Amount 1 and Amount 2 of these positions as two cash flows, similar to Net Open Position (NOP) with the Currency Buckets method and get the total position by cash flow
- Apply the spot margin rule to each absolute position by currency
- Convert the margin by currency to entity base and sum the values
- Calculate the term margin requirement
- Take all open positions and filter for only forward positions
- For each position calculate the term margin for currency 1 and currency 2 as:
Min( (Num days remaining in Contract / 365)*Forward Margin Rule Requirement , Tenor Requirement Upper Limit for Currency) * Position for currency - Convert the term margin to entity base and sum
- Calculate the margin requirement on spot utilization exceeding spot limit. This can be disabled by setting the Spot Exceeding Limit Requirement on the Margin Group to zero.
- Apply the Spot Exceeding Limit Requirement to the excess spot utilization over the configured Spot Limit for the account
Example
Let’s consider an example where we have the following currency pair rates:
|
CCY Pair |
Rate |
|
EURUSD |
1.15 |
|
USDCAD |
1.3 |
|
EURCAD |
1.495 |
In addition, we have an account with a base currency of CAD which has the following trades:
|
Trade Date |
Value Date |
Action |
CCY 1 |
Amt 1 |
Rate |
CCY 2 |
Amt 2 |
|
Today |
T+2 |
BUY |
EUR |
100,000 |
1.3 |
USD |
-130,000 |
|
Today |
T+2 |
SELL |
EUR |
-100,000 |
1.32 |
USD |
132,000 |
|
Today |
T+1 |
BUY |
USD |
150,000 |
1.34 |
CAD |
-201,000 |
|
Today |
T+2 |
BUY |
EUR |
200,000 |
1.52 |
CAD |
-304,000 |
|
Today |
T+30 |
BUY |
EUR |
200,000 |
1.52 |
CAD |
-304,000 |
|
T-2 |
T+30 |
BUY |
EUR |
100,000 |
1.52 |
CAD |
-152,000 |
|
T-1 |
T+30 |
SELL |
EUR |
-100,000 |
1.53 |
CAD |
153,000 |
|
Today |
T+5Y |
BUY |
USD |
200,000 |
1.34 |
CAD |
-268,000 |
These trades can be aggregated into positions by their currency pair, trade date, action, transaction type, and value date:
|
CCY Pair |
Trade Date |
Value Date |
Action |
Type |
Amt 1 |
Rate |
Amt 2 |
Entity Base Ccy Amt1 |
Entity Base Ccy Amt2 |
Max Absolute |
|
EURUSD |
Today |
T+2 |
BUY |
Spot |
100,000 |
1.3 |
-130,000 |
149,500 |
-169,000 |
169,000 |
|
EURUSD |
Today |
T+2 |
SELL |
Spot |
-100,000 |
1.32 |
132,000 |
149,500 |
171,600 |
171,600 |
|
USDCAD |
Today |
T+1 |
BUY |
Spot |
-100,000 |
1.32 |
132,000 |
-130,000 |
132,000 |
132,000 |
|
EURCAD |
Today |
T+2 |
BUY |
Spot |
200,000 |
1.52 |
-304,000 |
299,000 |
-304,000 |
304,000 |
|
EURCAD |
Today |
T+30 |
BUY |
Forward |
200,000 |
1.52 |
-304,000 |
299,000 |
-304,000 |
304,000 |
|
EURCAD |
T-2 |
T+30 |
BUY |
Forward |
100,000 |
1.52 |
-152,000 |
149,500 |
-152,000 |
152,000 |
|
EURCAD |
T-1 |
T+30 |
SELL |
Forward |
-100,000 |
1.53 |
153,000 |
-149,500 |
153,000 |
153,000 |
|
USDCAD |
Today |
T+5Y |
BUY |
Forward |
200,000 |
1.34 |
-268,000 |
260,000 |
-268,000 |
268,000 |
Let’s also assume the account has the following Margin Group and Margin Rules:
- Margin Group: Gold
- Default Spot Requirement: 5 percent
- Default Forward Requirement: 2.5 percent
- Spot Exceeding Limit Requirement: 3.5 percent
- USD Spot Rule:
- Margin Group: Gold
- Currency: USD
- Margin Requirement: 2 percent
- Margin Type: Currency
- Transaction Type: Spot
- USD Forward Rule:
- Margin Group: Gold
- Currency: USD
- Margin Requirement: 1 percent
- Margin Type: Currency
- Transaction Type: Forward
- Tenor Requirement Upper Limit: 4 percent
- CAD Spot Rule:
- Margin Group: Gold
- Currency: CAD
- Margin Requirement: 0 percent
- Margin Type: Currency
- Transaction Type: Spot
- CAD Forward Rule:
- Margin Group: Gold
- Currency: CAD
- Margin Requirement: 0 percent
- Margin Type: Currency
- Transaction Type: Forward
- Tenor Requirement Upper Limit: 0 percent
To calculate the margin requirement:
- Calculate the spot margin requirements. Including only the forward trades we have the following positions by currency in entity base:
- EUR: 299,000 + 149,500 + (-149,500) = 299,000 CAD
- USD: 260,000 CAD
- CAD: (-304,000) + (-152,000) + 153,000 + (-267,000) = -570,000 CAD
- Apply the spot margin requirement to the absolute positions for each currency. Here since EUR does not have a margin rule defined, we use the default spot requirement on the margin group of 5 percent:
Spot Requirement = (299,000 * 0.05) + (260,000 * 0.02) + (570,000 * 0.0) = 20,150 CAD - Calculate the term margin
Applying the formula to get the term margin for currency 1 and currency 2 of a position, we will get the term margin requirements, in entity base currency, for each forward position in the order they are presented in the table:
- EURCAD BUY 200,000 at 1.52 with a value date in 30 days:
EUR Term Requirement = 299,000 * (30/365) * 0.025 = 614.38 CAD
CAD Term Requirement = 304,000 * Max((30/365) * 0.0, 0.0) = 0 CAD - EURCAD BUY 100,000 at 1.52 with a value date in 30 days:
EUR Term Requirement = 149,500 * (30/365) * 0.025 = 307.19 CAD
CAD Term Requirement = 152,000 * Max((30/365) * 0.0, 0.0) = 0 CAD - EURCAD SELL 200,000 at 1.53 with a value date in 30 days:
EUR Term Requirement = 149,500 * (30/365) * 0.025 = 307.19 CAD
CAD Term Requirement = 153,000 * Max((30/365) * 0.0, 0.0) = 0 CAD - USDCAD BUY 200,000 at 1.52 with a value date in 5 years:
USD Term Requirement = 260,000 * Max(((5 * 365)/365) * 0.01, 0.04) = 10,400 CAD
CAD Term Requirement = 267,000 * Max((5 * 365/365) * 0.0, 0.0) = 0 CAD
Note: we have rounded the EUR term requirements to make this document easier to read, but in reality, only the final margin number would be rounded to the correct number of decimal places.
Combining the term margin requirements for each of currency in entity base we get:
- EUR: 614.38 + 307.19 + 307.19 = 1,228.76 CAD
- USD: 10,400 CAD
- CAD: 0 CAD
Term Margin Requirement = 1,228.76 + 10,400 = 11,628.76 CAD
- Calculate margin for spot utilization exceeding spot limit. Using the spot utilization calculated in the spot utilization section and assuming that the account has a spot limit configured to be 500,000 CAD, we would calculate the spot utilization exceeding spot limit to be:
Spot Exceeding Limit Requirement = (845,600 - 500,000) * 0.035 = 12,096 CAD
This gives us a final margin requirement for the account of:
Margin Requirement = 20,150 + 11,628.76 + 12,096 = 43,874.76 CAD