How Does Portfolio ‘Diversification’ Affect the Overall Margin Requirement in a Risk-Based Model?

Diversification reduces the overall margin requirement in a risk-based model. By holding positions that are not perfectly correlated, the potential loss from the portfolio as a whole is less than the sum of the potential losses from each individual position.

The risk model captures this netting benefit, leading to a lower initial margin requirement for a well-diversified portfolio compared to a concentrated one.