Intermediate Guide To E-Mini Futures Contracts - Margin
  1. Intermediate Guide To E-Mini Futures Contracts - Introduction
  2. Intermediate Guide To E-Mini Futures Contracts - Popular E-Mini Contracts
  3. Intermediate Guide To E-Mini Futures Contracts - Volume And Volatility
  4. Intermediate Guide To E-Mini Futures Contracts - Margin
  5. Intermediate Guide To E-Mini Futures Contracts - Rollover Dates And Expiration
  6. Intermediate Guide To E-Mini Futures Contracts - E-Mini Brokers
  7. Intermediate Guide To E-Mini Futures Contracts - Tax Advantages

Intermediate Guide To E-Mini Futures Contracts - Margin

Margin is essentially a loan that a brokerage firm extends to a client (the trader or investor) that is used for the purchase of trading instruments. Margin trading allows traders and investors to enter larger positions then they would otherwise be able to with a cash account because it provides leverage. This leverage amplifies both wins and losses and, as such, margin should be used with caution and consideration. In addition to the leverage afforded, margin gives traders the ability to sell short. When traders sell short, they are attempting to profit from falling prices. Selling short requires traders to begin a trade by borrowing shares or contracts from a broker (using margin) and then selling them. Traders buy back the shares or contracts (known as "buying to cover") when they wish to close the trade. The concept of margin differs between stock, forex and futures because stock and forex trading involves purchasing something tangible (a part of a company and a foreign currency) and futures trading involves buying or selling a contract whose obligation will be met at a future date. Margin for stock and forex trading is defined as borrowed money, whereas futures margin is considered an initial deposit or an "earnest money" deposit. Margin account holders pay interest on the amount of money used as margin. The margin interest rates vary depending on the current "broker call rate" or "call money rate" and the amount that is borrowed.

Minimum Margin
Brokerage firms require a minimum amount of funds in an account, or minimum margin, for traders to be able to use margin. The minimum margin requirements for futures contracts, known as performance bonds, are set by the exchanges that offer these contracts. These minimums change frequently in response to market activity. The minimum margin requirements change in response to events such as:

  • Changing volatility
  • Shifts in supply and demand
  • Changes in fiscal policy
  • Major geopolitical events
  • Natural disasters
In general, minimum margin rates decrease when daily price moves become less volatile and increase during periods of increased volatility. Individual brokerage firms can require higher minimum margin requirements (tighter restrictions) than the exchanges set in order to limit their own risk exposure.

Initial Margin
Initial margin is the margin that traders must pay for with their own money when initiating a position. Also known as futures requirement, these rates vary by contract, contract date and brokerage firm. Initial margin is a percentage of the full contract value of a position and is used to ensure that traders have enough cash in their accounts to cover losses.

Maintenance Margin
Maintenance margin is the minimum value that must be maintained in a margin account. As an example, imagine that a trader entered a position to buy (go long) the September 2012 ES when the contract was trading at 1355.00 points. Imagine also that the exchange (CME) required an initial margin of $4,500 to trade the contract, with a maintenance margin of $3,500. If price fluctuations in the ES bring the account balance under $3,500 (the maintenance margin amount) the trader would have to deposit additional funds to bring the account value back to the required initial margin. The potential gains and losses of the position fluctuate every time the settlement price of the contract changes. The final gain or loss is determined when the position is closed or when the contract expires.

SEE: Buying On Margin and Maintenance Margin

Margin Calls
A margin call occurs if the account falls below the maintenance margin amount. A margin call is a demand from the brokerage firm that money be added to a trading account to meet the initial margin requirements. If the demand is not met, the brokerage firm can close out any open positions in order to bring the account back up to the minimum value. The brokerage firm can close the position(s) without notifying the client in advance. Even if the brokerage firm offers the trader time to increase the equity in the account, it can sell off positions without consulting the trader. Traders may be able to avoid a margin call by closing out the losing position(s). Important terminology regarding margin are shown in Figure 3.

Figure 3 - Various margin terms.


Pattern Day Traders
Although futures traders are not subject to FINRA's Pattern Day Trading rule (which requires a minimum account size of $25,000), day traders may have different margin requirements than traditional overnight traders. If a broker-dealer identifies a client as a "pattern day trader" (anyone who executes four or more day trades within five business days), the broker-dealer may enforce special margin requirements on the client's day trading account(s).

Margin Trading Risks
Trading with margin involves a number of risks. The Financial Industry Regulatory Authority lists the followings risks of which traders and investors should be aware:

SEE: Margin Trading: The Risks

  • A brokerage firm can force the sale of open positions to meet a margin call.
  • The firm can close the positions with contacting the client.
  • The client is not entitled to choose which positions are closed to cover a margin call.
  • The firm can increase its "house" maintenance requirements at any time and without advance notice.
  • Clients are not entitled to extensions on margin calls.
  • Traders can lose more money than is deposited in a margin account.
Intermediate Guide To E-Mini Futures Contracts - Rollover Dates And Expiration

  1. Intermediate Guide To E-Mini Futures Contracts - Introduction
  2. Intermediate Guide To E-Mini Futures Contracts - Popular E-Mini Contracts
  3. Intermediate Guide To E-Mini Futures Contracts - Volume And Volatility
  4. Intermediate Guide To E-Mini Futures Contracts - Margin
  5. Intermediate Guide To E-Mini Futures Contracts - Rollover Dates And Expiration
  6. Intermediate Guide To E-Mini Futures Contracts - E-Mini Brokers
  7. Intermediate Guide To E-Mini Futures Contracts - Tax Advantages
RELATED TERMS
  1. Buying On Margin

    The purchase of an asset by paying the margin and borrowing the ...
  2. Margin Debt

    1. The dollar value of securities purchased on margin within ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions ...
  4. Initial Margin

    The percentage of the purchase price of securities (that can ...
  5. Excess Margin Deposit

    Funds deposited in a trading account beyond what is required ...
  6. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
RELATED FAQS
  1. What happens if I cannot pay a margin call?

    Minimum margin is the amount of funds that must be deposited with a broker by a margin account customer. With a margin account, ... Read Answer >>
  2. How exactly does buying on margin work and why is it controversial?

    Learn how purchasing stock on margin works, and understand the risk associated with margin accounts that make the strategy ... Read Answer >>
  3. What's the difference between profit margin and operating margin?

    Find out the differences between a company's gross profit margin, net profit margin and operating margin, and what each metric ... Read Answer >>
  4. What are the minimum margin requirements for a short sale account?

    In a short sale transaction, the investor borrows shares and sells them on the market in the hope that the share price will ... Read Answer >>
  5. Why does the Federal Reserve Board regulate which stocks can be bought on margin?

    Find out why the Federal Reserve Board began regulating margin stock purchases in 1934 and why margin requirements do not ... Read Answer >>
  6. What does it mean when the shares in my account have been liquidated?

    An account liquidation occurs when the holdings of an account are sold off by the firm in which the account was created. ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center