Series 3: 1.3.3. Futures Margin Requirements

1.3.3.  Futures Margin Requirements

Futures contracts are generally purchased on credit. The investor deposits part of the price at the clearinghouse of the exchange, and the clearinghouse guarantees future payment of the rest. The clearinghouse guarantees both sides of the contract, the short and the long. In doing so, the clearinghouse becomes the counterparty to every trade.

An investor that acquires a futures contract on credit is said to buy on margin. Margin is the security payment that is deposited with the clearinghouse. It may be made in cash or Treasury bills. An initial margin requirement must be paid for each contract that is purchased. A maintenance margin requirement must be sustained as long as each contract is in effect.

When futures are bought on margin, no funds are borrowed from a broker or anyone else. The margin requirement is a good-faith deposit made by the purchaser to ensure that it can meet its obligations to its customers and to the clearinghouse, which is the counterparty to the transaction. The margin deposit in futures markets is sometimes called a performance bond. If the clearing member firm defaults, the exchange is obligated to deliver on the contract. Unlike a stock market margin, the performance bond is a predetermined dollar amount, not a percentage of a security’s market price, and it is significantly smaller than the required margin for stocks and bonds. As you can see from the table below, the margin percentages are all well under 10%. The percentages vary as the contract price varies. The margin itself will stay the same. For a given commodity, the margin requirement is the same for both long and short positions.