What is a Margin Call?
A margin call occurs when the equity in a margin trading account falls below the brokerage’s required minimum value. This triggers the brokerage to demand that the account holder deposit additional money or securities to bring the account back up to the maintenance margin level.
Margin calls protect the brokerage by ensuring the account has adequate collateral. If the margin call is not met in a timely manner, the brokerage has the right to liquidate positions in the account to fulfill the call.
Understanding the different types of margin calls and how to meet them is crucial for avoiding forced liquidations and managing margin trading risks prudently.
Key Types of Margin Calls
There are three primary types of margin calls:
Maintenance Margin Calls
- Triggered when account equity falls below the maintenance margin level
- Minimum 25% maintenance margin set under Reg T
- Brokerages may require 30-40% maintenance margin
Fed Regulation T Calls
- Triggered when equity cannot meet 50% initial margin requirement under Reg T
- Applies to new purchases made without sufficient account equity
House Margin Calls
- Discretionary margin calls made per the brokerage’s policies
- Brokerages may have higher “house” margin requirements
- Accounts may face house calls even if above Reg T minimums
Maintenance Margin Calls
Maintenance margin calls are the most common type of margin call. They occur when the account equity falls below the brokerage’s maintenance margin requirement.
For example, if an account has a $50,000 total equity balance and the maintenance margin is 30%, then the margin maintenance minimum is 0.3 * $50,000 = $15,000. If due to trading losses the equity declines to $14,000, the account will receive a maintenance margin call.
The investor would then need to promptly deposit $1,000 in cash or additional securities to meet the 30% maintenance margin threshold once more. Accounts with margin calls outstanding may be restricted from executing new trades.
Regulation T Margin Calls
Regulation T is the Federal Reserve Board regulation establishing rules for margin accounts. Regulation T sets the initial margin requirement at 50% for most securities.
This means that the account must hold equity equal to at least 50% of the value of any new purchases made in the account. If the account does not have sufficient equity to satisfy this 50% initial margin requirement, it will trigger a Regulation T margin call.
For example, if an account has $10,000 in equity and buys $20,000 in new stock, the 50% initial margin rule requires equity of 0.5 * $20,000 = $10,000. In this case the purchase would satisfy Regulation T.
But if the account only held $8,000 equity, the $20,000 purchase would trigger a federal margin call for the $2,000 equity shortfall. The investor would need to promptly deposit additional funds to satisfy the Reg T minimum.
House Margin Calls
Brokerage firms can institute “house” margin calls in addition to the required federal Regulation T margin calls based on their internal policies.
For example, a brokerage could require margin accounts hold equity equal to 35% maintenance margin and 60% initial margin. These higher house requirements would trigger more margin calls than the federal 25% and 50% levels alone.
House margin calls help brokerages further limit risks from margin trading. Accounts facing house calls must promptly add equity or face position liquidations just as with other margin call types.
Causes of Margin Calls
Several scenarios commonly trigger margin calls:
- Underlying security prices decline significantly
- Account balances are withdrawn or transferred out
- Existing securities are sold, reducing account equity
- Leveraged ETFs or options positions move against account
- Additional securities purchased without sufficient equity
- Maintenance or initial margin requirements increased by broker
Careful account monitoring and risk management helps avoid margin calls, but rapid market moves can quickly cause account equity to dip below margin limits.
Getting Notified of Margin Calls
Brokerages typically notify investors of margin calls via:
- Email and text alerts of margin call status
- Margin call notifications within trading platforms
- Mailed paper letters for sustained outages
- Phone calls in urgent cases
Timely responding to margin call notices is vital to maintaining trading privileges and avoiding forced liquidations. Monitor notifications closely, especially during volatile markets.
Meeting Maintenance Margin Calls
To satisfy a maintenance margin call, investors can:
- Deposit additional cash or eligible securities into the margin account
- Sell existing positions to raise account equity
- Close enough losing positions to bring equity back above the maintenance margin minimum
- Request the brokerage grant a one-time waiver or time extension
- Transfer excess equity from other accounts held at the brokerage
- Meet limited margin calls using free credit balances
Meeting maintenance calls quickly helps ensure continued trading access. Waiting too long risks forced liquidations at adverse prices.
Satisfying Regulation T Margin Calls
To meet an outstanding Regulation T margin call, investors can:
- Deposit more cash or eligible securities
- Partially or fully close the security position that triggered the breach
- Request a waiver to meet the call via subsequent deposits
- Cancel unsettled pending orders that aren’t properly margined
- Transfer in additional equity from outside accounts
- Sell existing fully-paid or excess marginable securities
Swiftly satisfying Reg T calls is key to avoiding trade rejections or reversals. Margin call concessions are granted only occasionally.
Consequences of Unmet Margin Calls
If margin calls are not promptly met, typical brokerage recourses include:
- Charging higher interest rates on margin loans
- Preventing any new trades or withdrawals
- Reversing pending orders or recently executed trades
- Unilateral forced liquidation of positions at unfavorable prices
- Freezing or restricting the margin account
- Completely suspending trading privileges
- Closing the margin account or ending client relationship
Letting margin calls go unmet jeopardizes accounts and trading access. Brokers will act decisively to limit losses if calls are ignored.
Avoiding Margin Calls
Investors can sidestep margin calls by:
- Maintaining a reasonable cushion above minimum margins
- Trading moderately and avoiding overconcentration
- Using stop-losses to limit downside on volatile positions
- Sticking to quality stocks with lower volatility
- Monitoring account balances and margin usage daily
- Reducing leverage during periods of high volatility
- Keeping some excess equity in cash as a buffer
Prudent position sizing, risk management and preparedness helps prevent destabilizing margin calls in most market environments.
Closing Out Margin Positions
If meeting margin calls becomes untenable, strategic liquidations can raise equity:
- Sell riskiest or most overvalued positions first
- Pare positions gradually using limit orders to minimize losses
- Avoid selling into rapidly falling or illiquid markets
- Be prepared to hold or hedge volatile positions like options
- Maintain core long-term investments if possible
Controlled liquidations allow raising cash prudently while limiting losses and market impact.
Margin Calls in Short Selling
Short selling involves special risks and margin considerations:
- Shorts require initial margin just like long margin buys
- Being short a stock means unlimited loss potential if it rises
- Rising share prices increase margin requirements, potentially triggering calls
- Short squeezes can quickly escalate margins needed to maintain positions
- Shorts facing margin calls must deposit more equity or close out positions
Due to unlimited upside price risk, short sellers must vigilantly track margin impacts and risks.
Portfolio Margin Accounts
Portfolio margin accounts carry different margin dynamics:
- Require $100,000 minimum equity and approval
- Calculate margin requirements across the entire account portfolio based on risk
- Changes in one position can affect margin status of other positions
- Generally allow greater leverage than standard margin accounts
- Still face fed Reg T calls and particular position limits
Portfolio margin introduces complexity but can increase buying power for large accounts.
Best Practices for Managing Margin Calls
Here are smart tactics for handling margin calls:
- Maintain a cash buffer in case of calls, don’t fully invest account equity
- Size positions conservatively and use stop losses to limit downside
- Discuss the likelihood of margin calls with your broker when evaluating trades
- Closely track maintenance margin levels and equity balances
- Be aware of any house or special maintenance requirements
- Monitor positions proactively rather than waiting for broker notifications
- Have a contingency plan ready detailing how you will meet margin calls
Proactive risk management and preparation reduces scramble when margin calls hit.
To Recap
Margin trading allows leveraged exposure to markets but also comes with the risk of destabilizing margin calls. Understanding the factors that trigger various types of fed, maintenance and house margin calls is key to prudent account management. Careful position sizing, discipline around leverage, risk monitoring, and preparedness for volatility can together help investors avoid chaotic margin call scenarios. While margin trading will always entail risks, proper precautions can mitigate them.
Frequently Asked Questions
Q: What happens if a margin call is not met?
A: The brokerage may restrict trading, liquidate positions, charge higher interest rates, close the account or take other actions to limit their risk if a margin call is not addressed.
Q: How much time do I have to meet a margin call?
A: Margin calls should be met immediately or within 1-2 days at most. Brokerages differ in providing warnings before forced liquidations begin. Time is of the essence.
Q: Can I request a waiver or extension on margin calls?
A: Waivers are only granted on limited occasions, such as brief operational delays depositing funds. Extensions are generally not provided, to protect the brokerage.
Q: What triggers a maintenance margin call?
A: Account equity falling below the brokerage’s set maintenance margin level triggers a maintenance margin call requiring depositing funds to meet the minimum.
Q: How do I avoid margin calls?
A: Conservative leverage, stop losses on volatile positions, cash buffers, avoiding overconcentration, and proactive monitoring of margin balances helps avoid margin calls.
Q: Can a brokerage liquidate my account without notice?
A: Yes, but most make good faith efforts to notify clients of margin calls beforehand. However, immediate risk management needs can lead them to liquidate without notice in some cases.
Q: What happens to my account if I can’t meet a margin call?
A: You may lose some or all positions through forced liquidations. Accounts may be restricted or suspended until balance is brought positive. Significant losses are possible.
Q: Can meeting one margin call prevent further margin calls?
A: Not necessarily; additional market declines can lead to a string of margin calls over time. It depends on circumstances. Don’t assume addressing one call secures the account.
Q: Can I use other securities as collateral to meet margin calls?
A: Yes, depositing eligible stock shares or other marginable securities into the account can satisfy margin calls without needing to deposit cash.
In another related article, A Comprehensive Guide to Initial Margin Requirements
