Margin requirements by market

A contract for difference settles on the full value of the contract while only a percentage of that value has to be posted against it. The percentage is the margin requirement, and the money posted is margin. It is collateral, not a payment: it is held while the position is open, released when it closes, and it never buys anything.

The consequence has to be stated before anything else, because every other property of margin follows from it. Losses on a position are calculated on the full notional value of the contract and are not limited to the amount deposited against it. Gains are calculated on precisely the same basis and to precisely the same degree. The requirement determines the level at which a position becomes liable to be closed. It places no boundary on what the arithmetic can produce.

What the requirement is set against 

A requirement is an answer to a question about the market, not a commercial setting. The question is how far the instrument can plausibly move before the collateral posted against it is exhausted, and the answer is derived from the instrument's historical volatility, the depth available in it, and how continuously it trades. A market that moves in small increments and quotes around the clock needs less collateral to cover the same interval than one that moves in large steps and closes overnight.

That is why the requirement on a major currency pair is conventionally the lowest of any market and the requirement on a single share the highest. A major pair is quoted continuously by many firms, moves by a fraction of a percent on an ordinary day, and rarely gaps far. A single company can be suspended, can announce results outside trading hours, and can reopen a long way from where it closed with no opportunity to transact in between.

Regulators also set floors. Where a regulator specifies a minimum requirement for a category of instrument, a firm may require more than the floor and never less, so published requirements reflect the higher of the regulatory minimum and the firm's own assessment. A firm's schedule can therefore be more conservative than the regulation without being unusual.

The ordering across markets 

The ordering is consistent across the industry even where the specific figures are not, because it follows from the volatility and continuity of the underlying markets rather than from anybody's pricing decision.

• Major currency pairs carry the lowest requirements, being the most continuously quoted and least volatile of the categories.
• Minor and exotic pairs carry higher requirements than majors, reflecting thinner quoting and larger typical movements.
• Major equity indices sit above currency pairs, since they pause daily and reopen on overnight information.
• Gold and the major energy contracts sit higher again, being more volatile and more exposed to scheduled inventory and supply events.
• Single shares carry the highest requirements of the mainstream categories, because a single company can gap on its own announcements with no warning available in the price.

The actual percentages are published per instrument in its contract specifications, which is the only place they can be read reliably. They differ between firms, between account types and between instruments within a category, and a figure quoted for one category cannot be applied to another.

The arithmetic of a requirement 

The calculation is a single multiplication. Notional value, which is price multiplied by the units the contract covers, multiplied by the requirement percentage, gives the margin held. Where the instrument is quoted in a currency other than the account currency, the result is converted at the prevailing rate, so the amount held moves with the exchange rate even when nothing about the position has changed.

Two things are visible in those rows and neither is intuitive. The money result of the move is identical in all three cases, because it is a function of the notional value and not of the requirement. And in the first case that identical result is larger than the entire amount posted, which is the mechanism by which a loss is not limited to the deposit stated in plain arithmetic.

How it appears on an account 

Platforms present margin through a small set of related figures. Used margin is the total held against all open positions. Equity is the balance plus the unrealised result on those positions. Free margin is equity minus used margin, and it is what remains available to support new positions or to absorb an adverse move. Margin level is equity divided by used margin, expressed as a percentage, and it is the figure a close out procedure is measured against.

Because equity includes the unrealised result, the margin level moves continuously with the market even when no order has been placed and no requirement has changed. That is the single most important property of the display: it responds to the price, not only to activity, and a position left alone can move an account through a threshold without anything being done.

When a published requirement changes 

A requirement is not fixed for the life of a position. Firms raise them ahead of known events where a market is expected to gap: a national election, a referendum, a scheduled decision with a wide range of outcomes, or the days around a company's results. The change is announced in advance and applies to open positions as well as new ones, so an unchanged position can find more of the account's equity held against it than the day before.

Some firms also apply tiered requirements, under which the percentage increases with the size of the total position in an instrument. The reasoning is the same as the reasoning behind depth: a larger position is harder to close without moving the price, so it needs more collateral behind it. Where tiering applies, the requirement on a position is not a single percentage but a schedule, and it is published as such.