The leverage...
6.5 The leverage is 2:1. It doesn't matter that the stock is held in a margin account, but it does imply there might be margin debt (probably less than $25 million) on the liability side of the balance sheet. This margin debt does not enter into the leverage calculation. It is possible that this hedge fund carries short positions and that some of the $100 million is assets are actually stock loan agreements positions that the fund has borrowed to make delivery on short sales. The leverage calculation does not depend on the size of the liabilities.
6.6 It is sensible to include another $50 million (or $48 million) in assets in the calculation. This fund would resemble a fund that carried only cash positions but had leverage of 3:1. However, investors and trading counterparties would not be given enough information to know what positions exist off the balance sheet. As a result, the leverage would be only 2:1.
6.7 The dealer that executes the trades will limit the size of unsettled positions. The broker is at risk if its customer gets into financial difficulty. A prudent broker will monitor intraday positions real-time. The broker will also monitor intraday realized and unrealized losses. Finally, the broker may watch for exceptions from the pattern of trading typical of the customer (position size, types of assets traded, and other considerations).
6.8 Many futures exchanges have adopted SPAN margining. At the time of this writing, stock exchanges like the New York Stock Exchange and cash options exchanges like the Chicago Board Options Exchange have not adopted SPAN margining. Span margining could apply to currency futures, but much of the trading in foreign exchange takes place over-the-counter (OTC). No regulations govern margin on OTC currency trading, and a creditworthy hedge fund may be required to post only maintenance margin but no initial margin. SPAN margin can reduce the margin required for positions held on a single futures exchange, but the fund will likely get no reduction in margin due to positions held in various futures exchanges, even if the positions are carried by the same broker. Also, the broker is not constrained to collect only the minimum SPAN margin.