Maintenance or Variable Margins


Q.: What is Maintenance Margin?

A: It is important to note that the value of all contracts for difference positions is constantly being monitored and re-assessed by brokers. As a trader an important part of the contract is that you must agree to maintain the positions at the required deposit value on an ongoing basis.

Maintenance margin also sometimes referred to as variation margin is the amount of margin that is needed to maintain a position (remain invested in a trade). Initial margin is always higher than maintenance margin, so for as long as the initial margin is covered you do not have to worry about the maintenance margin. Usually, maintenance margin is about 75% of initial margin. When the available monies in your margin account are reduced by losses to below a certain level, known as the maintenance margin requirement, you will be required to deposit additional funds to bring the account back to the level of the initial margin. Or, you may also be asked for additional margin if the exchange raises its margin requirements.

 

Variation Margin refers to the difference between the initial margin and the margin needed to keep the position open as the position value changes. For instance, if the initial margin for gold is $2,000 and the maintenance margin is $1,500, you would need to have $2,000 allocated from your account as initial margin to trade the gold contract. Positions are marked-to-market every day meaning that every position is valued at the close of each business day with any profits credited to your trading account and losses deducted. This means that the current price is compared to the previous day's price and should losses on the position amount to, say, $600, the value of your initial margin would be reduced to $1,400, which is below the $1,500 maintenance margin requirement. Therefore, extra funds in the amount of $600 from your account would be automatically allocated towards bringing the initial margin figure back to $2,000. If there were not excess funds in the account to bring the initial amount back up to $2,000, the trader would have to meet the margin call promptly as otherwise the position would be liquidated by the broker which means having your investments sold by the provider because you can't meet the margin top up requirements.

Note that margins are computed on an intraday basis to ensure a sufficient level of margin cover is maintained. This means that you may have to pay more if the market moves against you. If the market moves in your favor, your margin requirement may be reduced.

Variation Margin Share Trade Example

Let's take the case where you bought 5,000 share CFDs in ABC stock at $4.20 giving you a total position value of 5,000 x $4.20 = $21,000. Assuming an initial margin of 10%, you would need to deposit at least $2,100 with the CFD broker to open this trade. If ABC's share price goes down to say, $4.10, you will now incur a loss of $500 ($0.10 x 5,000). This running loss referred to as variation margin is subtracted from your initial margin of $2,100, which leaves a deposit of $1,600. Since you still hold 5,000 share contracts at $4.10 you will have a margin requirement of $2,050 (i.e. 5000 x 4.10 x 10%). Since there's now a paper loss of $500, the initial margin has now been reduced to $1,600 which is $450 lower than the margin required to retain the position open and more margin is needed to top-up the account. This deficit in margin is sometimes referred to as a 'shortage in equity'. If you cannot maintain the margin requirement you will not be able to extend your position but you can always reduce or close the position.

Q.: What is a 'Shortage in Equity'?

A shortage in equity happens should the account balance falls below the required initial margin level. Accounts having a shortage in equity are usually only permitted to reduce open positions, until the equity balance is in more than the required deposit. No new positions can be opened until this situation is sorted out. Please also note that margin payments usually have to be respected 24 hours of being advised; in some circumstances margin call payments may be required on shorter notice. If you do not pay in time, your CFD provider can take action to close out your positions without further reference to you.

Q.: What is a Contingent Liability Transaction?

A: Contingent liability investment transactions are margined transactions like contracts for difference which require you to make a series of payments against the purchase price, as opposed of paying the full value of the contract immediately. If you trade in futures, contracts for difference or sell options you may sustain a total loss of margin you deposit with your broker to establish or maintain a position. Should the market move against you, you may be called upon to pay the additional margin at short notice to maintain the position (commonly known as a margin call). If you fail to do so within the time required, your position may be liquidated at a loss and you will be responsible for the resulting deficit.

Q.: What is NTR?

A: NTR stands for Notional Trading Requirement and refers to the amount of deposit to support an open position in addition to any losses.


Recommend this on Google

The content of this site is copyright 2015 Contracts for Difference Ltd. Please contact us if you wish to reproduce any of it