How Does the Concept of “Portfolio Margin” Differ from Standard Initial Margin?

Standard initial margin is calculated on a per-position basis, treating each trade in isolation. Portfolio margin, conversely, calculates the margin requirement based on the net risk of a trader's entire portfolio of positions.

If a trader holds offsetting positions (e.g. a long future and a short option), the portfolio margin system recognizes the hedge and reduces the overall margin requirement. This approach is more capital-efficient but requires a more sophisticated risk model to accurately assess the correlation and net exposure.