Understanding Maintenance Margin
| Understanding Maintenance Margin | |
|---|---|
| Cluster | How-to |
| Market | |
| Margin | |
| Settlement | |
| Key risk | |
| See also | |
Definition
Maintenance Margin is the minimum amount of Equity that a trader must maintain in their Margin Account to keep an open Futures Contract position active. It is set by the Clearing House or the specific Futures Exchange and is typically a lower percentage of the total contract value than the Initial Margin. If the account equity falls below the maintenance margin level due to adverse market movements, a Margin Call is issued, requiring the trader to deposit additional funds or close positions to bring the account equity back up to at least the initial margin level.
Why it matters
Maintenance margin serves as a critical protective measure for the brokerage firm or clearing house against potential losses that could arise from a trader's position moving against them. It acts as a buffer zone. If the equity drops below this level, the risk of the account becoming negative (i.e., the trader owing the broker more than the value of their assets) increases significantly, especially during periods of high Volatility. Adhering to maintenance margin requirements is essential for avoiding forced liquidation of positions.
How it works
The maintenance margin requirement is calculated based on the current market value of the positions held.
Calculation Basis
For most futures contracts, the maintenance margin is a fixed dollar amount or a specific percentage (often 75% to 80%) of the initial margin requirement, though this can vary by contract and broker.
Margin Call Trigger
When the trader's Margin Balance (Account Equity) drops to or below the maintenance margin level, the broker issues a margin call. The trader must then deposit sufficient funds (usually enough to bring the equity back up to the initial margin level) within a specified timeframe, often before the start of the next trading session. Failure to meet the margin call results in the broker forcibly closing some or all of the trader's positions to restore the required margin balance. This forced selling is known as Liquidation.
Practical examples
Consider a trader holding a long position in a standard E-mini S&P 500 Futures Contract.
- Initial Margin set by the exchange: \$12,500
- Maintenance Margin set by the exchange: \$11,000
If the market moves against the trader and the equity in their account falls from \$13,000 down to \$11,000, a margin call is triggered. The broker will demand the trader deposit funds to bring the equity back up, usually to the initial margin level of \$12,500. If the trader fails to deposit the required \$1,500, the broker may liquidate a portion of the position to cover the shortfall.
Common mistakes
A frequent mistake traders make is confusing the maintenance margin with the initial margin. Traders may believe that once they have met the initial margin requirement, they are safe until the market moves significantly against them. However, maintenance margin is the threshold that triggers immediate action. Another mistake is failing to monitor the account equity in real-time, especially during volatile market conditions, leading to a delayed response to a margin call. Relying solely on the broker to issue a call promptly can also be dangerous, as market conditions might necessitate immediate action to prevent further losses through liquidation.
Safety and Risk Notes
While maintenance margin protects the broker, traders should aim to keep their equity significantly above the maintenance level. Professional risk management dictates maintaining a buffer well above the maintenance margin to absorb unexpected price swings without triggering a margin call. Traders should always understand the specific margin rules of the Futures Commission Merchant (FCM) they use, as broker-specific requirements can sometimes be higher than the exchange minimums. Ignoring maintenance margin levels is a direct path to forced Stop Out procedures.
See also
- Initial Margin
- Margin Call
- Futures Contract
- Equity
- Volatility
- Margin Account
- Clearing House
- Liquidation
References
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