On the adequacy of single-stock futures margining requirements

Unlike the traditional futures contract risk-based approach to margining, new security futures contracts are margined under a strategy-based margining system similar to that which applies in the equity options markets. As a result, these new margin requirements are potentially much less sensitive to changes in market conditions. This article performs a simulation to evaluate whether these alternative margining methodologies can be expected to produce comparable outcomes. The analysis suggests that a 1-day settlement period will likely lead to collection of customer margins that are virtually always greater than that which its traditional risk-based counterpart would require. A 4-day settlement period would lead to margin requirements that both significantly under- and overmargin relative to a comparable risk-based system. This study argues that exchanges may approach the preferred probability of customer exhaustion by managing margin settlement intervals. Thus, the new strategy-based rules, in and of themselves, will not necessarily inhibit new security futures trading activity. (C) 2003 Wiley Periodicals, Inc.