administration:administration_risk_breakdown [WIKI]

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====== T4 Risk Breakdown ======
 
====== Position Limits ======
 
===== Explanation of byMarket Mode =====
 
  * **Settings:** Max Position settings are applied to each market individually. Outright markets use the number placed in the Outrights section, while spreads use the number placed in the Strategies section. The Account section is not used in this mode, so there is no limit on the total position in this mode.
  * **Explanation:** A market is any unique exchange-listed expiration or spread. For example, within Silver Futures, the Dec is a separate market from the Jan, and they’re both separate from the Dec-Jan spread. Similarly, options have unique markets for every put and call, strike by strike, as well as spreads. Furthermore, spreads traded in this account mode are not broken into their constituent legs, which means that a spread position that was entered via the spread and flattened via the legs will appear as separate line items that do not offset. This allows an account with a Max Position of 1 for Outrights and 1 for Strategies to buy 1 future in every expiration, buy 1 call in every strike of every expiration, sell 1 put in every strike of every expiration, and add on 1 of every possible spread in such a way that compounds the outright positions.

===== Explanation of byContract Mode =====
  * **Settings:** Max Position settings are applied to each contract individually. Long and short positions contribute to a single limit, so a limit of 10 will allow for +7 Dec and -3 Jan. All positions use the numbers placed in the Outrights and Strategies sections in tandem since all spreads are broken into their constituent legs. The Account section places a limit on the total position across all contracts.
  * **Explanation:** A contract is a family of markets. For example, Silver Futures (SI) would be a contract consisting of every outright silver future and every silver future spread. Silver Options (SO) would be a separate contract with separate limits. Note that any option group with a different contract code will have separate limits, so Silver Week 1 Options (SO1), Week 2 (SO2), etc. will all have separate limits. This means an account with a Max Position of 1 for Outrights can buy 1 SI Future, buy 1 SO option, buy 1 SO1 option, etc. without violating the position limit. The values for Outrights and Strategies are used in tandem in this mode because all strategies are broken into their constituent legs. This means that an account with an Outright limit of 10 and a Strategies limit of 20 will only be able to do 5 Dec-Jan spreads, not 20, because the 5 Dec outrights plus the 5 Jan outrights puts the account at the Outright limit of 10. If that same account had an Account setting of 50, then the position of 5 Dec-Jan spreads could only be done in 5 different contracts (i.e. Silver, Gold, Crude, Nat Gas, and RBOB) before no more positions could be added anywhere.

=====  Explanation of byAccount Mode =====
  * **Settings:** Max Position settings are applied to the account as a whole. Long and short positions contribute to separate limits, so a limit of 10 will allow for +10 Dec, -3 Jan, and -7 Feb. All positions use the numbers placed in the Outrights and Strategies sections in tandem since all spreads are broken into their constituent legs. The Account section places a limit on the total position across all contracts.
  * **Explanation:** The values for Outrights and Strategies are used in tandem in this mode because all strategies are broken into their constituent legs. This means that an account with an Outright limit of 10 and a Strategies limit of 20 will only be able to do 10 Dec-Jan spreads, not 20, because the 10 Dec long outrights hit the long Outright limit of 10, while the short 10 Jan outrights hit the short Outright limit of 10. If that same account had an Account setting of 50, then the position of 5 Dec-Jan spreads could only be done in 5 different contracts (i.e. Silver, Gold, Crude, Nat Gas, and RBOB) before no more positions could be added anywhere.

 =====  Explanation of byAccountDay Mode =====
  * **Settings:** Identical to byAccount Mode except that only current day positions are considered. Any positions from previous trading sessions are ignored.
  * **Explanation:** This mode allows for daily position limits but it does not limit how large the position can become over time. If an account starts with no position and has a limit of 10, then the account can buy 10 in one market and sell 10 in any other market. The next day, since those positions are ignored, the account can buy 10 more in the first market and sell 10 more in the second market.

 =====  Explanation of byPortfolio Mode =====
  * **Settings:** Identical to byAccount Mode.
  * **Explanation:** The purpose of byPortfolio Mode is to create an accurate, real-time, SPAN-like margin number for the account. This typically makes position limits obsolete, but they can still be added here if necessary. For example, a position limit of 100 for options would look at 100 0.01 delta options the same as 100 1.00 delta options, while the risk in terms of equivalent futures is 1 future vs 100 futures. With byPortfolio mode, a delta limit can be set that only allows, say, the equivalent of 10 futures of exposure. In this case, 1,000 0.01 delta options would look the same as 10 1.00 delta options, since they both result in 10 futures' worth of delta exposure.
 
====== Margin Limits ======
===== Explanation of byMarket Mode =====

  * **Futures:** Margin is applied to each market as it is traded. Outrights will have outright margin rates applied and spreads will have spread margin rates applied. Separate markets that would qualify for spread margin rates but were traded as outrights will still use outright margin rates. Offsetting spread and outright positions will not be offset in this mode. If an account enters a spread via the legs and flattens the position via the legs, the account will be charged spread margin for the entry and independent outright margin for the exit, even though the position should be flat. Accounts in this mode should enter and exit positions in a consistent manner (spread in, spread out or leg in, leg out) or be moved to a different account mode.
  * **Options:** Margin is applied to short option positions while Premium is used for long option positions. P&L will affect the account’s available cash for winning long options and losing short options only. Negative P&L on long options and positive P&L on short options are ignored until the positions are closed. As with futures, spread margin rates are only applied when option spreads are traded as spreads.
===== Explanation of byContract Mode =====

  * **Futures:** All positions are viewed as outrights on the front end, but the back end looks for all possible ways to arrange those outrights into spreads. Spread margin rates are applied to outright legs that can pair with other outright legs while outright margin rates are applied to any remaining unpaired outright positions.
  * **Options:** The same as options in byMarket Mode except that spread margin rates will be applied to option legs that can be combined to form basic option spreads (verticals, strangles, and straddles).
===== Explanation of byAccount Mode =====

  * **Futures and Options:** All positions are viewed as outrights on the front end, but the back end looks for all possible ways to arrange those outrights into spreads. Spread margin rates are applied to outright legs that can pair with other outright legs in the following spreads: futures calendars, long futures to long puts or short calls (1:2 ratio, same expiration), short futures to short puts or long calls (1:2 ratio, same expiration), as well as verticals, straddles, and strangles in options. All options in this mode use margin, regardless of whether they are long or short.
===== Explanation of byAccount Day Mode =====
  * Identical to byAccount Mode except that only current day positions are considered. 
  * Any positions from previous trading sessions are ignored.
===== Explanation of byPortfolio Mode =====
  * The entire position is processed through a matrix of stress tests to determine how much margin is required for the account as a whole. 
  * This is designed to produce values very similar to SPAN and is by far the best system for the determination of margin that we offer.
  
 ======  Risks to the FCM ======
 
===== Explanation of byMarket Mode =====
  * Allows a nearly unlimited position to be entered.
  * Positions entered via outrights and exited via legs will not offset.
  * Spread margin is only applied when spreads are traded as spreads.
  * Option spread margin is imperfect as it does not account for the delta of the spread.
  * Outright option margin is imperfect as it is a flat rate, regardless of delta.
===== Explanation of byContract Mode =====
  * Position limits are hit by the total number of contracts, regardless of buy or sell side.
  * Spread margin is not applied to futures vs options.
  * Option spread margin is imperfect as it does not account for the delta of the spread.
  * Outright option margin is imperfect as it is a flat rate, regardless of delta.
===== Explanation of byAccount Mode =====
  * Futures vs options and option vs option spread margin are imperfect as they do not account for the delta of the spreads.
  * Outright option margin is imperfect as it is a flat rate, regardless of delta.
===== Explanation of byAccount Day Mode =====
  * The same risks of byAccount Mode.
  * The account can accumulate a nearly unlimited position over time since previous inventory is ignored.
===== Explanation of byPortfolio Mode =====
  * Cross-product margin rates may not be in place for everything, i.e. ES vs NQ. 
  * This is still the most accurate mode and offers the best protection for the firm.