Market Operations - Margin Requirements

Of the 120 questions on the Series 3 exam, you can expect around 15 on margins, premiums, limits, settlements, delivery, exercise and assignment.

Margin Requirements
One of the reasons the futures market is so attractive to small investors, is its less stringent borrowing requirements. Margin requirements on futures exchanges are not nearly as high as those in the stock market, and even the individual investor can participate. In fact, futures margins are typically 10 to 20% of a contract's value, as opposed to the 50% currently required for a stock transaction. It behooves the licensed futures trader, then, to be aware of the rules governing margin and their implication for the broader economy.

Future Margins
There is a fundamental difference between futures margins and the margins associated with stocks and other securities; in the stock market, margin represents partial payment, but in the futures market, margin serves as a
performance bond. Because this bond is payable and renewable on a daily basis, it need only cover the anticipated change over the course of one day in the value of the associated futures contracts (marking to market).

Futures margins are generally expressed as dollar values per contract, rather than as the percentage familiar to stock traders.

In the United States, exchanges have a great deal of autonomy in setting margin requirements, although the Commodities Futures Trading Commission (CFTC), the primary governmental regulator of the futures market, has a role to play in the process. Each exchange establishes, and is authorized to revise, margin requirements and the documentation required to substantiate them. Member firms, incidentally, may require larger margins than the exchange minimum.

The amount an investor must have on deposit in her account is the "initial margin."

Once she posts her initial margin and begins trading, she must maintain a minimum balance known as "maintenance margin." If her balance falls below that level, she will receive a "margin call" requiring her to add money to the account or else it will be closed.

The Dreaded Margin Call

"Margin agreements"
are documents of understanding between a brokerage and its client. They specify how and when the firm expects margin calls to be met. While some brokerages may simply require that an investor send a personal check via regular mail, others may stipulate wire transfers or some other same-day transaction. They may also require the security of a cashier's or certified check. This portion of a margin agreement is sometimes called a "transfer of funds agreement." Margin agreements also state the procedures by which the brokerage can liquidate an investor's positions and close an account, if a margin call is not met.

Margin Calculations
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