A Few Questions on Margin:
What Is Margin and How Is It Calculated?
Before trading a futures contract, the prospective trader must deposit funds with a broker. These funds serve as a good-faith deposit by the trader and are referred to as margin. The main purpose of margin is to provide a financial safeguard to ensure that traders will perform on their contract obligations. The amount of margin required to place a trade varies from contract to contract and may vary by brokerage institution as well. The margin may be posted in cash, a bank letter of credit, or in short-term US Treasury instruments. The trader who posts this margin retains title to it.
There are three types of margin. The initial deposit just described is the initial margin - the amount a trader must deposit before trading any futures. The initial margin approximately equals the maximum daily price fluctuation permitted for the contract being traded. For most futures contracts, the initial margin may be 5 percent or less of the underlying commodity’s value. It may seem strange that this initial margin amount is so small relative to the value of the commodity underlying the futures contract, but that’s because futures contracts are marked-to-market each day. In the futures markets, traders are required to realize any losses in cash on the day they occur.
When the value of the funds on deposit with the broker reaches a certain level, called the maintenance margin, the trader is required to replenish the margin, bringing it back to its initial level. The maintenance margin is generally about 75 percent of the amount of the initial margin. This demand for more margin is known as a margin call. The additional amount the trader must deposit is called the variation margin. Variation margin must always be paid in cash.
Here’s an example that will illustrate how margin works in the grain markets (actual margin requirements may be different):
Contract: Corn
Margin: $675
Maint. Margin: $300
In this case, the initial margin needed to begin trading one corn contract is $675. That is, you must have $675 worth of non-pledged funds in your account in order to trade one corn contract. In the event that the value of your funds in your account falls below $300, you will have to deposit the difference between the value of your account and $675, bringing it back to maintenance margin.
Margin can lead to some potentially confusing developments. Let’s say you want to buy one corn contract, so you place $675 in your brand new account. Corn prices fall seven cents, resulting in a loss of $350. Your account value now stands at $325 ($675-$350). The next day, the price of corn drops another two cents, causing you to lose $100 additional dollars. Your account value now stands at $225, or $75 dollars below the maintenance margin. You will be required to deposit $450 dollars to bring your account back to the initial margin level of $675 ($225 + $450), although your most recent loss was only $75, before which you didn’t receive a margin call. The rule is that once your account falls below maintenance level, you must deposit enough funds to bring it back to the initial margin level.
For more information on margin rates, please call your Olympus Futures professional at (800) 815-0480.
What Happens If I Receive a Margin Call?
A margin call occurs when the value of funds in your account decreases below the maintenance margin for the contracts you have in your account (see above for more information). A margin call can only occur when you have open trades in your account or when you wish to start trading your account.
Receiving a margin call is very serious, and must be met with the same commitment that you meet any business obligation you enter into. Upon receiving a margin call, you should contact you broker to understand how the call was generated and how much funds you must deposit in order to return to good standing. These funds should then be wired or sent to Peak Trading Group on the same day that you receive the margin call.
Failure to promptly respond to a margin call will result in liquidation of all open positions until the value of your account is above the maintenance margin requirements. You will also be liable for any funds due to Peak Trading Group, which reserves the right to use any and all legal remedies to recover any funds due.
Current Margin Rates:
Rates
At Olympus we treat pricing as part of your overall trading solution, matching your commission structure to your individual trading style. And, we take special care to meet the needs of active and professional traders. Olympus will research your needs so you can be informed as to your options as a trader.
One of the ways Olympus works to individualize research with pricing is to be sure that the traders are informed of the programs that the exchanges offer. For example: The Chicago Mercantile Exchange offers several programs providing discounted clearing fees for corporations, Hedge Funds, banks and individual traders. With these programs traders can minimize their trading costs while maximizing their execution opportunities.
For more information on margins and rates, please call your Olympus Futures professional at (800) 815-0480.
