Futures Margins

Participants in a futures contract are required to post performance bond margins in order to open and maintain a futures position.

Exchanges set clearing margin requirements, and brokers can impose higher house requirements. These amounts change with the contract, volatility, portfolio and broker; no fixed percentage applies to every futures position.

Margins are financial guarantees required of both buyers and sellers of futures contracts to ensure that they fulfill their futures contract obligations.

Initial Margin

Before a futures position can be opened, the account must meet the broker’s initial margin requirement. This performance-bond collateral supports the contract obligations. Account equity changes as the position is marked to market, and margin is not the purchase price or a maximum-loss limit.

Maintenance Margin

The maintenance margin is the minimum amount a futures trader is required to maintain in his margin account in order to hold a futures position. The maintenance margin level is usually slightly below the initial margin.

If account equity falls below the required maintenance level, the broker can demand additional funds or liquidate positions under the account agreement. A trader should not assume advance warning or extra time. House requirements can exceed the exchange minimum.

Example

For a hypothetical example, assume a trader has $10,000, buys one August crude-oil futures contract at $40 per barrel, and the contract represents 1,000 barrels. Assume initial margin of $9,000 and maintenance margin of $6,500. These are historical teaching inputs, not current margin requirements or quotes.

Since his account is $10000, which is more than the initial margin requirement, he can therefore open up one August Crude Oil futures position.

One day later, the price of August Crude Oil drops to $38 a barrel. Our speculator has suffered an open position loss of $2000 ($2 x 1000 barrels) and thus his account balance drops to $8000.

Under the assumed unchanged requirements, the $8,000 balance is below initial margin but above the $6,500 maintenance level. This simplified example therefore does not yet require a top-up; actual broker requirements and liquidation procedures can differ.

Unfortunately, on the very next day, the price of August Crude Oil crashed further to $35, leading to an additional $3000 loss on his open Crude Oil position. With only $5000 left in his trading account, which is below the maintenance level of $6500, he received a call from his broker asking him to top up his trading account back to the initial level of $9000 in order to maintain his open Crude Oil position.

This means that if the speculator wishes to stay in the position, he will need to deposit an additional $4000 into his trading account.

If the position is closed at the assumed $35 price, the remaining equity is $5,000 before fees and other costs. A different fill price, further market movement or liquidation expenses would change that amount. Futures losses can exceed the initial deposit.