What Is a House Maintenance Requirement?
A house maintenance requirement is the level of minimum margin account equity that is required by a brokerage firm. House maintenance requirement levels are based on the standards set out in Regulation T of the Federal Reserve.
Although Regulation T specifies the minimum maintenance requirements permitted by law, brokerage firms are free to adjust their own “house” maintenance requirements provided that their standards are more rigorous—that is, higher—than the minimum requirements set out in Regulation T.
- House maintenance requirements are the standards for minimum margin account equity levels chosen by brokerage firms.
- They must be greater or equal than the 25% level stipulated in Regulation T. Often, they are in the 30% to 50% range.
- Brokerage firms will sometimes grant lower house maintenance requirements for their larger or more sophisticated clients, although these figures will always be at or above the 25% minimum.
How House Maintenance Requirements Work
The purpose of maintenance requirements is to ensure that investors using margin accounts to make leveraged investments do not find themselves unable to repair their margin loans. In this manner, maintenance requirements are intended to reduce credit risk for the brokerage firms. By extension, they aim to reduce the systemic risk that might otherwise arise from widespread defaults by margin traders.
House maintenance requirements typically range between 30% and 50%. While stocks are the security most commonly purchased in a margin account, many other securities such as mutual funds, Treasuries, corporate bonds, and options may be purchased "on margin" subject to varying purchase and maintenance requirements.
According to Regulation T, margin traders must maintain equity levels of at least 25% of the value of their investments. If they fail to maintain this level, they may find themselves subject to a margin call by their broker.
In this situation, the trader would be required to promptly deposit additional collateral into their account. If they fail to do so, their broker can liquidate their investment positions in order to pay back their margin. Any outstanding balance of the loan would then need to be repaid separately by the margin trader.
Bull vs. Bear Markets
During bull markets, margin traders may find their maintenance requirements to be unduly restrictive. After all, at a time when asset prices are generally rising, it can be tempting to leverage as much as possible in order to maximize their return on equity (ROE).
However, the danger of this strangery quickly reveals itself once the market begins to turn. During bear markets or periods of sudden financial shock such as occurred in the 2007-2008 financial crisis, margin traders are often faced with significant risk.
The decline in portfolio values, combined with the need to repay large margin loans on short notice due to margin calls, can sometimes force margin traders into significant financial duress.
Often, these traders will forfeit all of the gains made in previous years, and may even be forced to liquidate other personal assets in order to repay their margin loans. Therefore, from this perspective, the need for maintenance requirements becomes much more clear.
Example of a House Maintenance Requirement
The house maintenance requirement will often be higher than the maintenance margin set out by the Federal Reserve's Regulation T, which stipulates that an equity level of at least 25% must be maintained.
In addition to maintaining house maintenance requirements that are higher than the 25% mandated by Regulation T, brokerage firms often also have different house maintenance requirements for different account holders. Typically, this stratification is based on the size, creditworthiness, or perceived sophisticated of the client.
For example, smaller and less experienced margin traders may be required to adhere to a 40% house maintenance requirement, while larger and more experienced clients may receive a 30% threshold.