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Maintenance Margin

: Summary


Maintenance Margin - Definition


Maintenance Margin is the minimum amount of cash you need to have in your futures trading account in order to remain in a futures position.


Maintenance Margin - Introduction



Maintenance Margin, or also known as Maintenance Level or Minimum Margin Requirement, is the amount of money that you must maintain in your account in order to keep a futures position running. If your cash balance, or Margin Balance, falls below this level, you would receive the famous and dreaded "Margin Call", which is a notification from your broker to top up your margin balance with cash back up to its initial margin level.

This free tutorial shall explain in depth what Maintenance Margin is, how it is calculated and how it affects your futures trading. Read the full tutorial on futures margin.


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What is Maintenance Margin in Futures Trading?


Maintenance Margin is one of three margin terms that all futures traders must understand. The other two being Initial Margin and Variation Margin.

Unlike Initial Margin and Variation Margin (which are cash that you actually pay), Maintenance Margin is really just a level below which you would need to top up cash (Variation Margin) in order to keep your futures trading position going. Maintenance margin isn't some amount of money you pay in order to "maintain" a futures position. In fact, maintenance margin is simply fanciful industrial term for "Minimum Cash Balance". Yes, whenever the cash balance deposited in your futures trading account drops below this "Minimum Cash Balance" due to losses, you would be asked to top up cash (Variation Margin), failing which the position will be forcefully closed.





Purpose of Maintenance Margin


The purpose of maintenance margin is really the clearinghouse's way of limiting their risk exposure to non-performing futures contracts. One of the reasons why futures traders can trade futures with confidence is that performance of each futures contract is guaranteed by the clearinghouse. Now, in order to make good such a guarantee, clearinghouses need a way of limiting their risk exposure as well and the whole margin system in futures trading is the answer.

By having futures traders deposit an initial margin when opening a new futures position, the clearinghouse is guaranteed that there are cash available so that losses for the day can be deducted against. Once this margin balance drops to a low level, the risk of that cash running out and the trader going into default on the next loss increases. As such, futures traders would be required to top up cash to their margin account once that low level is reached and this low level is the Maintenance Margin level.



How is Maintenance Margin Determined?


Maintenance Margin level is different for each asset in each market. Fortunately, maintenance margin level is always clearly stated alongside the initial margin requirement in every futures chain so you really can't miss it. Maintenance margin is normally lower than initial margin so that a position can take some small losses without needing to top up variation margin. Many factors go into determining maintenance margin but generally, it is a function of the level of risk the regulators, exchange or brokers are willing to take. The lower their risk appetite on a particular futures contract, the nearer the maintenance margin would be to the initial margin. There are even cases when the maintenance margin level is exactly the same as the initial margin.

Maintenance Margin


It must be noted here that not every futures contract or exchange requires Maintenance Margin. There are many exchanges around the world for index futures or forex futures trading that requires only initial margin with margin call kicking in only when the whole margin account goes negative. This may reduce the amount of margin calls that futures traders get but also dramatically increase the risk of default as the margin account is allowed to go negative. Single Stock Futures trading in the US market definitely requires Maintenance Margin and is a protection not only for the clearinghouses but also helps prevent futures traders from losing more than what they invest.



How To Calculate Maintenance Margin Level?


As you can see from the picture of AAPL's Single Stock Futures contract above, the maintenance margin is stated as $43.58 with the initial margin slightly higher at $54.47. How do we calculate it in actual dollars and cents if we go long on 3 contracts?

Maintenance margin in actual dollars and cents = (Contract Size X Maintenance Margin) X Number of Contracts

Actual Price of underlying asset when maintenance margin will be hit = Stock Price - (Initial Margin - Maintenance Margin)

Maintenace Margin Calculation Example:

Assuming you went long 3 contracts.

You would have paid (100 x $54.47) x 3 = $16,341 in initial margin.

Maintenance margin level = (100 x $43.58) x 3 = $13,074.

Price of AAPL when maintenance margin will be hit = $217.89 - (54.47 - 43.58) = 217.89 - 10.89 = $207

This means that when your $16,341 paid as initial margin drops down to below $13,074, you would receive a margin call to top up variation margin. This happens when AAPL drops to $207.





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Futures Margin
Variation Margin
Initial Margin
Margin Call
Futures Contracts
Single Stock Futures
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