Understanding Futures Margin

Continuing with the same example used for the initial margin, imagine the maintenance margin is 30 percent. The value of the margin account is the same as the value of the 1,000 shares. The investor’s equity will always be $3,500 less than the value of the shares since the investor must pay back that money.

1. To borrow money from your brokerage firm, you’ll first need a margin account.
2. At that point, the investor would receive a margin call from the brokerage firm.
3. When trading on margin, an investor should also consider the interest or other fees charged by their broker in order to calculate the true cost of the trade and the profit or loss potential.
4. If the balance in the account is less than the maintenance margin, the trader must place additional funds to meet the maintenance margin.
5. That is, you must provide a minimum of 50% (initial margin) of the value of the trade you want to initiate.
6. Initial margin refers to the minimum amount of equity a trader must provide to open a leveraged position.

Regulation T only sets the initial margin requirements on equity securities but FINRA’s margin rule, 4210, adds initial margin requirements on securities that Reg T does not set specific requirements like corporate bond. Additionally, Rule 4210, specifies maintenance requirements that set a limit to the value that an account can lose. If an account drops below these limits (creating a “margin deficiency”), a customer is required to either https://g-markets.net/ deposit additional collateral or liquidate positions in the account. Importantly, brokers, at their discretion, may liquidate an account at any time to eliminate a margin deficiency. Investors must be keenly aware of both initial and maintenance margin levels when participating in margin trading. Margin requirement minimums are set by regulators, but true margin requirements vary depending on the broker and the invested securities.

Breaking Down Maintenance Margin

In this example, the initial margin is 50% of the total purchasing power, though it can vary depending on the percentage of the margin the broker extends. If the account’s value falls below this threshold due to losses, the trader receives a margin call, requiring them to deposit more funds or close positions. Initial margin refers to the minimum amount of equity a trader must provide to open a leveraged position. It’s a form of security deposit, ensuring that the trader has enough skin in the game.

A margin call happens when the value of a trader’s account gets below the broker’s maintenance margin requirement. Investors have two types of margin calls to contend with – federal calls and house calls. The federal call refers to the initial margin requirement, named so because that’s the level set by Reg T. If the initial margin level is broken, the investor will receive a ‘fed call’. A house call comes from the broker and occurs an account drops below the maintenance margin level. The computation relies on computer modeling to perform risk analysis using multiple pricing scenarios and these scenarios are designed to measure the theoretical gains or losses of the positions given changes in the underlying price. Accordingly, the margin required is based on the greatest loss that would be incurred in a portfolio if the value of its components move up or down by a predetermined amount.

What is the initial margin used for?

Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC). Trader B profited $250 and was credited the profits so his account balance grew from $5,500 to $5,750. Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. These regulations have evolved, especially in response to financial crises, to further safeguard market integrity. Margin requirements are not just broker-imposed but are also subject to regulatory oversight. BNP Paribas offers a complete suite of services dedicated to Over-the-Counter (OTC) instruments, we are ideally positioned to support you and help you reduce your operational and counterparty risks.

How do you avoid maintenance margin?

In the futures market, the various exchanges (CME, CBOE, and ICE) regulate their margin rates differently. Each exchange stipulates the minimum acceptable levels the brokers can adopt. Instead of borrowing money from the bank to finance your home purchase, you’d have to save up the full amount of the purchase price in order to buy the house — a process that could take decades. Borrowing money can sometimes be the most cost-efficient way to purchase an asset. The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries.

This process allows for magnification of potential profits but also magnifies potential losses. In the extreme event that securities purchased in a margin account decline to zero value, the account holder needs to deposit the full initial what is a spread in trading value of the securities in cash or other liquid collateral to cover the loss. Although the initial margin serves as a sort of collateral, owing to the fact that the market is very dynamic, its value can increase or decrease over time.

There is a need to quickly assess the impact of proposed trades, calculate accurate initial margin for completed trades, and seamlessly manage the margin exchange workflow to efficiently manage portfolio margin. If, on the other hand, your initial margin is 25%, your purchasing power multiplier is 4. By contributing an initial margin of $8,000, your total purchasing power climbs to $32,000.

Rather, the initial margin for a crude oil contract could be around $5,000 per contract as determined by the exchange. This is the initial amount the trader must place in the account to open a position. Currently, FINRA requires that the maintenance margin be set to a minimum of 25%. However, brokers can ask for a higher margin requirement for certain volatile stocks and assets. If the value of an asset drops below the margin maintenance requirement, the broker may perform a margin call to request that you deposit additional funds or sell enough assets to cover the call.

So they could borrow up to 80 to 90 percent from the brokers, which were mostly the banks. However, by using a futures contract, Trader A can put down a fraction of the contract’s $140,000 notional value. Margin is set by the futures exchange and is typically 3% to 12% of the contract’s notional value. Some brokers may choose a higher requirement; therefore, initial margin can change at any time. The value of a futures contract is derived from the cash value of the underlying asset.

FINRA’s Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. The OCC provides more information about the margin model used and how the calculations work. See Portfolio Margin Data for information regarding filings required by member firms related to their portfolio margin programs. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.

FINRA Data provides non-commercial use of data, specifically the ability to save data views and create and manage a Bond Watchlist. The instruction mechanism for pledge and release of collateral can be complex. ISDA estimates that over 775 firms fall under the scope of the final phase (AANA threshold set at 8bn EUR). At the time of writing only the last 6th wave remains to be enforced, firms with an AANA above €8 bn will be impacted. This website is using a security service to protect itself from online attacks. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data.

If the asset drops far enough, you may be issued a margin call, which requires depositing additional cash or potentially be forced to sell some of your securities to cover the margin call. But if the asset increases in price, traders can potentially profit on the stock, earning a greater return than if they just paid in full with a cash account. The timeline under which firms are impacted depends on their “aggregate average notional amount” (AANA) of non-centrally cleared derivatives (at consolidated group level) falling above a pre-determined regulatory threshold. All instruments (even the physically settled forex forward and forex swap transactions that are exempted from initial margin requirements) count for the purpose of calculating the AANA.