Unlocking The Power Of Portfolio Margining: Hxro’s SPANDEX Risk Engine
One of the biggest considerations for any derivatives trader, whether trading on-chain or off-chain, is avoiding liquidation by maintaining the collateral requirements associated with all open positions.
Historically in crypto derivatives markets, the required margin put up by traders is calculated on an isolated, position-by-position basis.
The initial margin for a given position is established up front, then based on an ongoing fixed percentage of the overall position (“maintenance margin”). Failure to maintain the minimum maintenance margin requirement often results in the liquidation of your position.
When a trader has several positions open simultaneously, the total required margin can quickly stack up, making the use of their capital extremely inefficient, lowering their ROI and limiting their overall trading opportunity. While this has long been standard practice for crypto derivatives, isolated margin is suboptimal and misaligned with how traders can more efficiently account for risk.
Hxro Network’s SPANDEX is the only on-chain, real-time, portfolio-based risk and margin engine. Along with Dexterity, Spandex underpins all risk infrastructure for all traders and dapps connected to Hxro Network.
The goal of portfolio-based margin is for margin levels to be set in a way that more precisely reflects the actual net risk of the trader’s account. The trader can benefit from portfolio margin because resulting margin requirements are generally lower than requirements based on isolated risk.
Isolated vs. Portfolio Risk and Margin
SPANDEX real-time margin requirements are calculated by looking at the risk of the traders portfolio as a whole, rather than the more common method of calculating margin on an isolated, position-by-position basis.
By assessing collective risk at the portfolio level vs. each isolated position, SPANDEX accounts for different risk factors and adjusts account margin requirements accordingly. This means that assets in your portfolio that may have offsetting risk effects could result in significant margin requirement relief (examples below).
Real-Time Risk Updates
To capture the greatest benefits of transparency and on-chain risk management, SPANDEX calculates risk on every market update. This may include a change in wallet balance, a change in mark price, or time to expiration. These factors can all play a role in how a portfolio’s risk is assessed. Changes in input values would therefore update the user’s risk health as well as the health of the entire market product group.
Here is a hypothetical example of how portfolio margin works:
Suppose you had two highly correlated positions in your portfolio – a long $SOL perp and a short $SOL future against it.
Because these two derivatives are both highly correlated to the price of the $SOL spot market, their correlation to each other is also likely to be high.
In an isolated risk model, the account would be margined as if each position is independent of the other.
In a portfolio-based approach, risk is measured based on the asset composition of the portfolio.
Since the two positions highly correlated, and because they are offsetting positions, portfolio-based margin could provide as much as 90% margin relief for the user, resulting in a more efficient use of risk capital.
Based on the above example, the risk capital required on an isolated basis is roughly 6.3x more than if the position was margined using a portfolio-based methodology.
As with any type of margin trading, portfolio margin does come with risks such as:
1. A portfolio margin account generally permits greater leverage in an account and greater leverage could create greater losses in the event of an adverse market movement.
2. As with any risk model, it may be difficult to account for all portfolio risks.
3. Because portfolio margining is determined using sophisticated mathematical calculations and values that are derived from market data oracles, it may be more difficult for traders to predict the size of future margin deficiencies in their accounts.
4. Traders should always evaluate the risks of portfolio margin when making a trading decision.