Margin close out explained

Every open position has collateral held against it, and every open position has an unrealised result that moves with the market. When the second erodes the first far enough, the firm closes positions to stop the erosion. That procedure is a margin close out, sometimes called a stop out, and the threshold at which it begins is published as a percentage.

It is worth being exact about what the threshold is a percentage of, because the phrasing is compact and easily misread. The figure is the account's equity, meaning the balance plus the unrealised result on open positions, divided by the margin currently held against those positions. That ratio is the margin level, and the close out threshold is a level of it.

The sequence, in order 

The process has three stages and they are frequently compressed into one in conversation, which loses the fact that only the last of them does anything.

1. The margin level falls as the unrealised result on open positions goes against the account. Nothing is triggered and nothing is required. Equity is simply lower than it was.
2. The margin level reaches the warning threshold. The platform marks the account, usually by colouring the margin figures and sending a notification. This is a notification and not an instruction, and it changes nothing about the positions.
3. The margin level reaches the close out threshold. The firm begins closing positions at the prevailing market price until the level is restored above the threshold, or until no positions remain.

The distinction between the second and third stages is the one that matters. The warning is a courtesy that depends on a working connection and a delivered message, while the close out is automatic and depends on neither. An account can pass through the warning threshold and the close out threshold inside a single fast move, in which case the notification and the closure arrive together or in the wrong order.

Which positions close, and in what order 

Firms publish an ordering rule, and the two common ones produce different outcomes from the same account. Closing the largest losing position first restores the margin level in the fewest transactions, because that position is both consuming the most margin and generating the most erosion. Closing positions in the order they were opened is simpler to describe and can require more of them to be closed.

Closing stops as soon as the margin level is restored above the threshold, which means a close out usually leaves some positions open. Which ones survive is a consequence of the ordering rule rather than of anything about their merits, and the surviving set is frequently not the set an account holder would have chosen. The rule is published in the account documentation, and it is the one detail of the procedure that genuinely varies between firms.

The arithmetic of a close out 

Two features of that progression are worth noticing. The margin level fell by half while the unrealised result doubled, because equity is in the numerator and the margin held is unchanged in the denominator. And the account was closed out with equity still positive: the threshold is not zero, and it is not intended to be, because closing at zero would leave no room for the closing trades themselves.

For YAL accounts the published close out level is 50% of the margin held against open positions.

Why a close out can leave less than the threshold 

The threshold names a level at which closing begins, not a level at which the account settles. Positions are closed at the prevailing market price, and between the moment the threshold is breached and the moment the last position is closed the market continues to move. In ordinary conditions that interval is short and the difference is small.

In a market that has gapped, the interval contains a jump. Every position is closed on the far side of it, and the resulting equity can be well below the threshold, in extreme cases below zero. The close out procedure did not fail in that case; it was executed at the only prices that existed. This is the same mechanism that fills a stop order away from its level, applied to a whole account at once.

Where a regulator requires negative balance protection for retail clients, a debit balance arising this way is written back so that the account's liability is limited to the funds in it. That is an account level remedy applied after the positions have closed. It does not prevent the closure, does not improve the prices achieved and is not a per position guarantee.

Everything that moves the margin level 

The market moving against open positions is the obvious cause and not the only one. Financing posted at the daily rollover reduces equity every night a position is carried. A firm raising a published requirement ahead of a known event raises the denominator without anything happening to the market. A position in an instrument quoted in a foreign currency has both its margin and its result converted, so a movement in that exchange rate alone changes the level.

The general point is that the margin level is a computed figure with several inputs, only one of which is the price of the instrument being watched. An account can approach a threshold on a day when the position itself has barely moved, and the platform's own margin display is the only place all the inputs are already combined.