Portfolio margin & the scenario grid

Portfolio margin is the OCC's risk-based approach — its engine is called TIMS (Theoretical Intermarket Margining System) — and it is the conceptual ancestor of every risk-based system that followed.

The mechanics:

• Group positions into class groups (same underlying) and product groups (correlated underlyings).
• For each class group, build a scenario grid: shock spot across a range — ±15% for typical equities, ±20% or more for high-vol names, tighter for broad indices — at ten equally spaced points, and shock implied vol up and down at each point.
• Fully reprice every position at every node.The class group's requirement is the worst-case loss across the grid.
• Apply offsets between class groups at prescribed percentages — 90% within a highly correlated product group, less across groups — then sum, with a minimum per position.

The key conceptual point: the hedge benefit is automatic, because you reprice the whole portfolio at each node rather than netting requirements computed separately. A long stock / long put position shows a small worst-case loss because the put gains where the stock loses in the same scenario. This is the same reason netting sets matter in counterparty credit risk — you compute the measure on the aggregate, not aggregate the measure (see the PFE module).