Unlike FOREX margin, which is a single yet dynamic figure that constantly fluctuates based on the notional value of the contracts being traded, futures margin is relatively static. Although the exchange and brokerage firms have the right to increase, or decrease, margin requirements at any time, changes are typically infrequent.
The premise of margin is to mitigate risk exposure to the exchange and brokerage firms by ensuring that traders have enough funds on deposit to cover losses that might reasonably be seen within a trading session. Accordingly, futures exchanges set margin rates based on current market volatility and not necessarily the nominal value of the contract, which is the dominant method in FOREX. Nominal value is the total worth of the currency contract when leverage is eliminated. However, as the nominal value increases, the futures exchanges tend to increase margin simply because, at higher prices, currencies tend to see larger price moves and expose traders to additional risk.
When traders refer to their futures margin requirement, they are referring to the initial margin. In other words, “initial margin” and “margin” are often used synonymously. In detail, initial margin is the amount of capital the exchange requires a trader to have on deposit to hold a given currency futures contract beyond the close of trade on the session the order was executed. For example, if the initial margin for a standard-sized Euro futures contract is $5,400, a trader should have at least this much in a trading account to execute a trade that is intended to be held overnight. Day traders are not necessarily subject to the same requirements.
The minimum account balance that must be maintained at the close of trade to avoid a margin call is known as the maintenance margin. Futures exchanges typically set the maintenance margin at about 70% to 80% of the initial margin. Should an account balance dip below the maintenance margin requirement, as measured by the close of trade on any particular day, a margin call is generated and the trader is required to bring the account back above the initial margin. This can be done through position liquidation, adding funds to the trading account, or even mitigating margin using option hedges. Once an official margin call is triggered, it is no longer enough to bring the equity above the maintenance margin level; the account must meet the initial margin. A margin call is triggered only if the account is in violation at the close of a trading session. At any point intraday, it is nearly irrelevant. Therefore, it is quite possible for an account to experience a margin deficit in the middle of the trading day only to be off the hook by the close of trade, and vice versa. This differs from FOREX, where traders are commonly issued intraday margin calls. This is because their margin requirement is being consistently measured as opposed to solely at the end of the trading day, as is the protocol in futures.
Margin calls state account details such as open positions, required initial and maintenance margin, the margin deficiency, and current account value. In addition to a formal notice, brokerage firms display margin call details on the trader’s daily statements, including the number of days the margin call has been active. Futures brokers typically give traders two or three days to eliminate a margin call on their own accord, but each brokerage firm is different. Deep-discount brokers tend to be much less lenient when it comes to margin calls and forced account liquidation.
If a client goes one step beyond a simple margin call and is in danger of losing more than the funds on deposit, it is not uncommon for risk management clerks to force liquidate positions regardless of the brokerage firm and service type, and they have every right to do so.
If traders must have the initial margin on deposit to enter a trade, there are exceptions for those who enter a trade based on the premise of offsetting their risk and obligation by the end of that particular trading session. For those traders engaged in the practice of day trading, brokerage firms, and even individual brokers, will often negotiate a discounted margin rate offering more leverage than is granted to traders who are holding positions overnight. For the purpose of margin, day trading is any activity in which trades are entered and exited within a single trading session. In today’s world, the currency futures markets trade nearly 24 hours per day. Therefore, it is entirely possible for a trade to be entered in the evening, held overnight, and offset before the close of the day session to be treated as a “day trade.” Conversely, although this trade was held “overnight,” under the usual pretense of the phrase, both the entry and the exit occurred within a single trading session and, therefore, falls into the day-trading category in regard to margin.
Depending on a trader’s established relationship with his brokerage firm, or more importantly an individual broker, the margin charged on any intraday positions may be anywhere from 50% to 10% of the exchange’s stipulated overnight rate. Naturally, only those clients believed to be responsible enough to have access to excessively low margin requirements are awarded the privilege; irresponsible traders are viewed as a credit risk to the brokerage and might not be granted the same freedoms. This is similar to the threats posed by those with low credit scores to a credit card company. With that said, as a means of risk management implemented by brokerage firms, some platforms are now capable of automatically liquidating accounts in danger of losing more than what is currently deposited. In the case of auto-liquidation, brokers might extend even more lenient margin policies to day traders simply because the luxury of auto-liquidation mitigates risk to the firm. Similar to the way a trader analyzes the market in terms of risk and reward, brokerage firms assess clients on a risk/reward basis and proceed accordingly. Brokerage revenue is commission based; they want you to trade, but not if it isn’t worth the potential consequences.
Futures brokers who have auto-liquidate capabilities often ask clients to sign a disclosure statement acknowledging they are aware that positions might be offset without prior consent to the client if the account is deemed to be in danger of going negative, although they technically have the right to do so even without the agreement. A common practice among futures brokers is to strategically place a stop order at a price that would prevent the account from losing more than is on deposit. However, as futures traders become more and more self-directed, this courtesy is slowly becoming less popular simply because in some ways it poses additional risk and potential liability to the broker. For example, “unruly” clients can easily cancel a stop order placed on their behalf to prevent a debit balance, and brokers simply don’t have time to babysit accounts to ensure clients don’t do so. In addition, if a stop order is placed for a specific number of contracts and the trader reduces the size of the position without adjusting the stop order, he might attempt to hold the brokerage firm liable for any erroneously resulting trades.