believe that a firm is required to contact them for a margin call to be valid, and that the firm is
not allowed to liquidate securities or other assets in their accounts to meet a margin call unless
the firm has contacted them first. This is not the case. While most firms notify their customers of
margin calls and allow some time for deposit of additional margin, they are not required to do
so. Even if a firm has notified a customer of a margin call and set a specific due date for a
margin deposit, the firm can still take action as necessary to protect its financial interests,
including the immediate liquidation of positions without advance notification to the customer.
Here is an example of the margin requirements for a long security futures position.
A customer buys 3 July EJG security futures at 71.50. Assuming each contract
represents 100 shares, the nominal value of the position is $21,450 (71.50 x 3 contracts x 100
shares). If the initial margin rate is 20% of the nominal value, then the customer’s initial margin
requirement would be $4,290. The customer deposits the initial margin, bringing the equity in
the account to $4,290.
First, assume that the next day the settlement price of EJG security futures falls to
69.25. The marked-to-market loss in the customer’s equity is $675 (71.50 – 69.25 x 3 contacts x
100 shares). The customer’s equity decreases to $3,615 ($4,290 – $675). The new nominal
value of the contract is $20,775 (69.25 x 3 contracts x 100 shares). If the maintenance margin
rate is 20% of the nominal value, then the customer’s maintenance margin requirement would
be $4,155. Because the customer’s equity had decreased to $3,615 (see above), the customer
would be required to have an additional $540 in margin ($4,155 – $3,615).
Alternatively, assume that the next day the settlement price of EJG security futures rises
to 75.00. The mark-to-market gain in the customer’s equity is $1,050 (75.00 – 71.50 x 3
contacts x 100 shares). The customer’s equity increases to $5,340 ($4,290 + $1,050). The new
nominal value of the contract is $22,500 (75.00 x 3 contracts x 100 shares). If the maintenance
margin rate is 20% of the nominal value, then the customer’s maintenance margin requirement
would be $4,500. Because the customer’s equity had increased to $5,340 (see above), the
customer’s excess equity would be $840.
The process is exactly the same for a short position, except that margin calls are
generated as the settlement price rises rather than as it falls. This is because the customer's
equity decreases as the settlement price rises and increases as the settlement price falls.
Because the margin deposit required to open a security futures position is a fraction of
the nominal value of the contracts being purchased or sold, security futures contracts are said to
be highly leveraged. The smaller the margin requirement in relation to the underlying value of
the security futures contract, the greater the leverage. Leverage allows exposure to a given
quantity of an underlying asset for a fraction of the investment needed to purchase that quantity
outright. In sum, buying (or selling) a security futures contract provides the same dollar and
cents profit and loss outcomes as owning (or shorting) the underlying security. However, as a
percentage of the margin deposit, the potential immediate exposure to profit or loss is much
higher with a security futures contract than with the underlying security.
For example, if a security futures contract is established at a price of $50, the contract
has a nominal value of $5,000 (assuming the contract is for 100 shares of stock). The margin