MARGIN IN FUTURES: INITIAL VS MAINTENANCE AND MARGIN CALLS

What Is Margin in Futures Trading?

In futures trading, margin refers to the amount of capital a trader must deposit with a broker to open and maintain a position in a futures contract. Unlike equities, where "margin" often means borrowing money to buy shares, in futures, the term refers to a performance bond—ensuring both parties fulfil their obligations under the contract.

Futures contracts are standardised agreements to buy or sell an asset at a pre-determined price on a specific future date. Given the leverage inherent in these instruments, margins are crucial to mitigating counterparty risk. Traders don't pay the full value of the contract upfront; instead, they post a portion of it as collateral. This allows for significant gains—or losses—on relatively small price movements.

There are two primary types of margin in futures trading:

• Initial Margin: The minimum amount required to open a futures position.
• Maintenance Margin: The minimum equity that must be maintained to keep the position open.

The margin requirements are set by the exchange but can be influenced by broker policy, contract volatility, and the trader’s account size and overall credit. Margins are recalculated daily based on market movements, a process known as marking to market. If a trader’s equity drops below the maintenance margin, a margin call is issued—requiring additional funds to restore the account balance.

Understanding how each type of margin functions is pivotal for effective risk management in futures trading, as well as ensuring compliance with regulatory standards and broker-imposed thresholds.

What Is Initial Margin in Futures?

Initial margin is the amount of capital required to initiate a position in a futures contract. It functions as a good-faith deposit that ensures traders have sufficient funds to cover potential losses. This margin is not a down payment or a partial payment for the asset; instead, it acts as security that helps protect the integrity of the market.

Set by the futures exchange and subject to brokerage adjustments, initial margin levels depend on several key factors:

• Volatility – Highly volatile contracts tend to have higher margin requirements.
• Contract Value – Larger contracts require higher initial margins.
• Regulatory Considerations – Compliance with bodies like the Commodity Futures Trading Commission (CFTC) in the U.S. or the Financial Conduct Authority (FCA) in the U.K.

For example, suppose a crude oil futures contract is trading at £70 per barrel, and one contract covers 1,000 barrels. The notional value would be £70,000. Instead of needing the full amount, a trader may only be required to deposit £6,000 to open a single position. This figure represents the initial margin.

Leverage arises because traders control large positions with relatively small sums. However, this amplifies both profits and losses. Since the position's value can fluctuate daily, the initial margin acts as a buffer against minor adverse changes. It also plays a role in the clearinghouse's ability to guarantee contract performance across all counterparties.

Traders must maintain this minimum funds amount at the outset of the trade. If funds drop below this level due to market movement, the broker may request additional funds before allowing further trades to be placed. Note that initial margin is distinct from a loan—traders don’t accrue interest, and there's no debt involved.

Understanding initial margin is crucial for any trader, given its direct influence on a trading strategy’s feasibility, exposure management, and capital allocation. Brokers may require higher margin for speculative accounts or thinly traded contracts, underscoring the need for strong risk controls.

High-frequency and institutional traders often optimise their capital by managing initial margin across multiple positions and assets via portfolio margining, which brokers may offer to clients with sufficient sophistication and capital levels.

Understanding Maintenance Margin and Margin Calls

Once a futures position is opened with the initial margin, traders must maintain a minimum amount of equity known as the maintenance margin. This is typically lower than the initial margin—usually around 75% of it. Its function is to ensure that the account holds enough capital to absorb daily losses incurred from adverse price movements.

Each trading day, futures accounts are marked to market, meaning gains or losses are credited or debited based on closing prices. If these losses cause the account balance to fall below the maintenance level, the broker will issue a margin call. This is a request for the trader to deposit additional capital—known as variation margin—to bring the account balance back up to the initial margin requirement.

Here’s how the process typically unfolds:

1. The trader opens a position with £6,000 initial margin; the maintenance margin might be £4,500.
2. If the position moves unfavourably and the account drops below £4,500—say, to £4,000—a margin call is triggered.
3. The trader must promptly deposit funds to return the account to at least the £6,000 initial margin level.

Failure to meet a margin call can result in the broker forcibly closing the position to prevent further losses and ensure compliance. Timing is crucial—some brokers require calls to be met within hours, others give until the end of the trading day. The specific terms depend on the brokerage agreement.

Why Margin Calls Matter:

• They serve as early warning systems, signalling excessive risk exposure.
• They enforce discipline and prevent runaway losses in volatile markets.
• They maintain integrity in the futures market by ensuring parties can meet obligations.

Traders can manage maintenance margins by:

• Setting stop-losses to limit potential downside.
• Using lower leverage to provide a wider buffer.
• Monitoring positions continuously, especially in fast-moving markets.

Importantly, margin calls differ from stock margin accounts. In futures, the call must be met by contributing additional cash or by liquidating positions—there’s no option to borrow. This makes futures trading more demanding from a cashflow and capital management perspective.

Many experienced traders maintain a margin cushion—extra funds in the account—to absorb intraday movement and avoid forced liquidation. Technologies such as automated risk management systems and margin calculators help traders stay informed and proactive.