Risk-based concentration (RBC) margin is a new margin system available to all margin-approved retail accounts. RBC margin is a model that compares the theoretical loss of a position in your account to your account’s net liquidation value. If the position loss creates a negative net liquidation value in your account, we call this “exposure”.
We maintain an Expected Price Range (EPR) for each security for which you can trade. This EPR is theoretical estimate in which we expect the security could potentially move up or down a given amount in a single day. The EPR is not a predictor of price movement. Rather, it is a calculation of what the security’s price could realistically move in a day in response to an external factor such as news or a general market shock. This calculation is based on criteria such as the security’s volatility, historical data, liquidity, among others.
Similarly, a Point of No Return (PNR) is calculated for each underlying security in your account. This represents the percentage move the security would have to make, based on your direction of risk, before you would lose your entire account value. Beyond this point, the account could become unsecured. An example of these EPR and PNR values is shown in figure 1. Simply put, this percentage represents how much of a price move your equity can support before your account value goes to zero.
FIGURE 1: EXAMPLE OF RBC MARGIN RISK METRICS. This table displays the position’s maintenance requirements and shows the account’s PNR versus the stock’s EPR. In this example, the account can handle a 55.32% move on XYZ and the theoretical expected price range is 50%. Source: thinkorswim. For illustrative purposes only. Past performance does not guarantee future results.
RBC margin compares these two figures. If the PNR of a position is outside of the EPR range we have for the security, you are only required to hold the lowest possible maintenance requirement for that security, which may still be higher than the minimum 30%, depending on special margin requirements. However, if your position's PNR falls within this range, then that position has exposure and your account can no longer support that potential move. An example representing exposure can be seen in figure 2. Another way to view this: if your account (PNR) is inside the expected potential price movement (EPR), your account is in danger of having a negative value, which we call the risk exposure amount.
FIGURE 2: EXAMPLE OF RBC MARGIN EXPOSURE. Note how the PNR is now in red, this indicates this position has exposure. In this example, XYZ has the base requirement of 40%, but the exposure would cause the requirement to become 50%. Source: thinkorswim. For illustrative purposes only. Past performance does not guarantee future results.
This exposure causes the maintenance requirement to be held at the EPR percentage in the direction of risk, which is often higher than the base requirement. In turn, this new requirement can sometimes lead to a significant change to your available funds which can create a margin call. This margin call may need to be met immediately as margin calls caused because of position exposure are much more urgent than other types of margin calls.
Please note: depending on the exposure of the position, we may require immediate action at any time.
There are ways to track this exposure on the thinkorswim platform when trading. Under Monitor > Activity & Positions you can click on the numerical value on the far right of your underlying position either labeled BP Effect or Margin Req. This will show you the upside and downside EPR for the security, as well as where your PNR lies. If the number is in red, this means that your PNR would be achieved prior to the EPR and that you are carrying too much exposure in that position.
RBC margining involves a great deal more risk than cash accounts and is not suitable for all investors. Minimum qualification requirements apply. RBC margining is not available in all account types. This is not an all-inclusive metric to the risk in any account. We evaluate numerous other house risk metrics and rules that may require you to reduce a position(s) for other reasons.
Use of RBC margin involves unique and significant risks, including increased leverage, which increases the amount of potential loss, and shortened and stricter time frames for meeting deficiencies, which increase the risk of involuntary liquidation. Client, account, and position eligibility requirements exist and approval is not guaranteed.
Margin trading increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels. Margin is not available in all account types. Margin trading privileges subject to TD Ameritrade review and approval. Carefully review the Margin Handbook and Margin Disclosure Document for more details. Please see our website or contact TD Ameritrade at 800-669-3900 for copies.