OMS-II examines the portfolio as a whole to see how an adverse movement in the value of an underlying instrument would affect the value of the entire portfolio of a given counterparty. It uses a range of inputs in the margin calculation, some of which are specified below.
Market Price Models for Option Contracts
The market value of an option contract at each valuation point is calculated using industry standard valuation models. The market price models used by Nasdaq Clearing to calculate margin requirements are based on the Black-Scholes or the binomial option valuation model for stock options, and Black-76 for index and interest rate options.
Different values for the account must be calculated since the market often moves after collateral is pledged until Nasdaq Clearing can close a position in the event of a default situation. To do this, OMS-II varies the price for the underlying security for each series to calculate the neutralization cost. In this way, OMS-II creates a “valuation interval” for each underlying security. The size of the valuation interval depends on the length of the liquidation period and the size of the historic fluctuations in the price over this liquidation period.
The upper and lower limits of the valuation points represent the worst expected movement (during the lead-time) for the margin calculation. However, the worst-case scenario for a portfolio with different options and forwards/futures based on the same underlying instrument can occur anywhere in the valuation interval. In order to reflect this, the valuation interval is divided into 31 valuation points for equity products.
OMS-II calculates the neutralization cost for each series with the same underlying security in each valuation point; the actual margin requirement is then based on the valuation point that rendered the highest margins, i.e. the worst-case scenario. This means that a portfolio which contains a series for which margins normally would be calculated at different ends of the valuation interval is calculated in the same valuation point. This methodology is justified since the market can only go in one direction at a time (see Correlations Between Instruments below on this page).
Implied Volatility and Volatility Shifts
The risk for a change in implied volatility is taken into account by calculating the neutralization cost of an account by a higher and lower implied volatility than the market implied volatility. Therefore the neutralization cost is calculated at each of the valuation points for three different implied volatility levels; low, market and high. A typical valuation interval therefore consists of 3x31 valuation points.
OMS-II produces a vector file for each contract cleared. A vector file consists of a data series that is shared by all positions in the series. There are primarily two reasons to produce a vector file. The first is to achieve computational efficiency and the second is that the vector files can be distributed externally so that members can replicate the margin calculations in their own systems.