When investors open margin accounts with brokerages, they gain the ability to leverage their capital by borrowing funds to buy more shares of stocks, bonds, and other securities. However, trading on margin introduces risks that must be managed carefully to avoid losses.
A house call represents one of the key risk management tools used by brokerages. House calls serve as margin maintenance requirement notices informing traders that their equity has dropped too low and needs to be restored.
This comprehensive guide examines what house calls are, why brokers issue them, and how to meet maintenance requirements when you receive a call to avoid forced liquidations.
What is a House Call in a Margin Account?
A house call refers to a notice issued by a brokerage firm when the equity in your margin account falls below their minimum maintenance requirement. House calls are sometimes referred to as “maintenance margin calls.”
For example, if your broker requires you to maintain equity of at least 30% in your margin account at all times, and your equity drops to 25%, you will receive a house call instructing you to deposit additional funds.
Key facts about house calls:
- Notices that your margin account equity is below the brokerage’s requirement
- Also known as “maintenance margin calls”
- Required equity is based on market value of securities
- Gives you a specific timeframe to add more cash or collateral
- Failing to meet a house call can trigger liquidation
House calls serve as warnings that you need to add equity to your margin account or else the brokerage may start closing out positions on your behalf to restore the required margin maintenance level.
How Do House Calls Relate to Maintenance Requirements?
House calls directly relate to the maintenance requirements imposed on margin accounts:
- Regulators dictate minimum maintenance requirements for all brokers
- Individual brokerages set their own stricter “house” requirements
- Requirements specify the percentage of equity you must hold at all times
- Your equity must exceed the requirement relative to current market values
- Falling below the house requirement triggers a house call
- The call notifies you that equity must be restored to the required level
So in simple terms, house calls are notices that your equity has fallen out of compliance with the brokerage’s specific ongoing maintenance requirements for your margin account.
What Happens When You Receive a House Call?
Here is the typical process when you receive a house call on your margin account:
- Your equity drops below the brokerage’s maintenance requirement
- You are issued a house call notice by phone, email, or your account portal
- The notice specifies the equity dollar amount you need to deposit
- You usually have 2 to 5 business days to add more cash or securities
- If the call is not met, the brokerage will start closing out positions
- Enough positions are liquidated to restore the required equity percentage
It’s crucial to act promptly when you receive a house call to prevent unwanted liquidations. Have funds ready to inject into your account on short notice.
How Are Maintenance Requirements Calculated?
Maintenance requirements are calculated as a percentage of the total market value of all marginable securities held in your account.
For example:
- You have $100,000 worth of marginable stocks in your account
- Your broker’s requirement is 30%
- 30% of $100,000 is $30,000
- So it would help if you held minimum equity of $30,000
If the market value of your securities declines, the minimum equity dollar amount required drops proportionately:
- Holdings decrease to $80,000 value
- 30% of $80,000 is $24,000
- Minimum equity needed is now $24,000
The requirement fluctuates based on market fluctuations. Equity must be adjusted accordingly.
What Happens if You Do Not Meet the House Call?
If you do not deposit sufficient additional equity to meet the house call within the required timeframe, usually two to five business days, the brokerage will start forcing the liquidation of positions in your account.
Enough securities will be sold to raise your account equity until the maintenance requirement percentage is restored. Any remaining margin loan balance would still need to be repaid separately.
It’s important to take house calls seriously to avoid unwanted liquidations. Have a plan in place for rapidly raising equity through cash deposits or selling securities yourself when needed.
Reasons You May Receive a House Call
There are a few common scenarios that can cause your equity to drop low enough to trigger a house call:
- Volatility causes the value of your marginable securities to decrease
- Concentrated positions in a small number of volatile stocks
- The brokerage increases maintenance requirements due to market conditions
- Trading extensively without monitoring equity balances
- Depositing additional cash/securities at regular intervals to maintain equity levels
- Unexpected deposit reversals or account withdrawals
- Trading illiquid securities with volatile pricing
Carefully managing position sizes, diversification, and account balances are key to avoiding house calls. Don’t wait for a call before taking corrective action.
Tips for Avoiding House Calls
You can reduce the likelihood of getting a house call by:
- Maintaining excess equity as a buffer so you don’t get close to the minimum
- Trading less volatile stocks and diversifying holdings
- Using stop orders to limit downside risk
- Monitoring your equity daily and preemptively depositing funds if needed
- Modifying trading activity when volatility increases
- Not aggressively overleveraging your account
- Keeping cash on hand to rapidly meet house calls if needed
- Avoiding high-risk speculative investments when using margin
Proactive risk management goes a long way towards steering clear of house calls. Don’t let your equity deteriorate too close to margin limits before making adjustments.
Examples of House Calls
Here are some examples to demonstrate house call scenarios:
Example 1
- Broker requirement is 35% equity
- You have $100K securities bought on 50% margin
- Equity drops to $40K which is 40% of $100K
- No action required as you remain above 35%
Example 2
- Broker requirement is 35% equity
- You have $100K securities bought on 50% margin
- Equity drops to $30K, below 35% of $100K
- You receive a house call to deposit $5K
Example 3
- Broker requirement is 30% equity
- You have $100K securities bought on 60% margin
- Securities increase to $150K value
- Your equity exceeds 30% due to appreciation
The key is monitoring your equity percentage daily and maintaining an adequate buffer so you don’t get close to the house requirement threshold.
Special Considerations for Pattern Day Traders
For margin accounts designated for day trading, the $25,000 minimum equity requirement still applies in addition to any maintenance requirements.
So pattern day traders need to be sure they maintain both:
- Minimum $25,000 equity at all times under FINRA rules
- Excess of brokerage’s maintenance requirement percentage
Falling below either threshold can result in trading suspensions or house calls. More stringent requirements give day traders less flexibility if markets become volatile.
To Recap
Margin trading allows greater leverage in your portfolio, but also greater risk if not managed carefully. Receiving a house call notice from your brokerage is a warning sign that action is required to avoid losses.
House calls indicate your equity has fallen below the brokerage’s ongoing maintenance margin requirements. Promptly depositing additional funds when receiving a call is crucial.
Implement prudent risk practices like stop orders, equity buffer maintenance, and diversification. Don’t wait for a house call before injecting more capital if needed. Understand and respect margin rules to avoid disruptive liquidations. Used strategically, margin can enhance returns, but overleveraging will compound losses when markets decline.
Frequently Asked Questions
Q: Can brokerages change their maintenance requirements frequently?
Yes, brokers often increase maintenance requirements during periods of high volatility or around major events. You need to monitor your broker’s current requirements frequently and adjust equity accordingly.
Q: How quickly must a house call be met?
Most brokerages give you 2 to 5 business days to deposit additional equity to meet a house call. However, some may demand funds in less than 2 days, depending on market conditions and risk policies. Carefully review call notices.
Q: Can liquidations fully repay your margin loan?
No, the forced liquidations are only intended to restore your account equity to the maintenance requirement, not necessarily repay the total margin loan. You remain responsible for any outstanding margin loan balance still owed.
Q: Can accounts be restricted for not meeting house calls?
Yes, many brokerages reserve the right to impose trading limitations and restrictions if you do not promptly meet house calls. Examples include limiting future margin borrowing, disallowing withdrawals, or suspending trading entirely.
Q: What if the market is closed when you receive a house call?
You still must deposit funds to meet the call within the specified period, even if the market is closed and you are unable to sell holdings. With electronic transfer options, you can often wire cash from external accounts to satisfy calls quickly.
Q: Can brokerages liquidate retirement account assets to cover margin calls?
No, only assets within the same margin account can be liquidated to meet a margin call or house call. Brokerages cannot draw funds from other accounts like IRAs to cover margin requirement shortfalls.
Q: Can you negotiate the terms of a house call notice?
No, standard brokerage account agreements give firms the right to issue house calls on their preset terms whenever minimum equity requirements are breached. You are unlikely to be able to negotiate timing extensions, waiver of liquidations, or requirement reductions.
In another related article, A Comprehensive Guide to Initial Margin Requirements
