Margin Requirements

A margin requirement can be defined as the minimum equity sum that investors must keep in their margin account prior to any transaction.

This is a requirement for trading with any brokers across all asset classes. Margin requirements may also be referred to as maintenance margin, minimum maintenance, or maintenance requirement.

Using the example of equities, the New York Stock Exchange (NYSE) and Financial Industry Regulatory Authority (FINRA) have a fixed margin requirement of 25% of the sum value of the securities available in a margin account.

However, though 25% is the minimum industry requirement, trading brokerages sometimes require between 30% to 40% of the total securities value as a margin requirement.

This is required as a way to reduce the risk of an investor potentially defaulting on the loan.

For example, if a trader possesses a margin account equity sum of $10,000, which means the trader must maintain at least $2,500 in their margin account.

Should the trader’s equity appreciate up to $12,500, then the trader’s margin requirements increase from $2,500 to $3,125.

Why Are Margin Requirements Important?

If the trader’s equity account falls below margin requirements set forth by a broker, that trader will receive what is known as a margin call.

This represents a request to deposit more or sell off pre-existing assets to fulfill margin requirements.

Margin requirements exist and are heavily regulated by the FINRA, NYSE, and the Federal Reserve Board due to the potential of margin trading able to incur astronomical gains along with immense losses.

These requirements are important to preventing disturbances in the securities and global financial market.

Margin trading is firmly regulated and the reason behind some brokerages raising their minimum margin requirements in recent years as protectionary means.