Margin helps ensure both parties fulfill their obligations in a transaction.
The term margin is used in both the equity and futures markets; however it means different things for each market.
In futures, for traders the margin amount is viewed as a performance bond - one that helps ensure both parties fulfill their obligations in the transaction.
Both buyers and sellers are required to deposit margin in their futures trading accounts prior to initiating a position.
Initial margin is the amount of funds necessary to open a futures position. Initial margin is 10% higher than maintenance margin.
Maintenance margin is the minimum amount that must be kept in the trading to maintain the futures position.
The exchange sets the margin amount for each product but brokers may collect additional margin if they feel it is warranted.
If funds in the trading account drop below the maintenance margin level:
- A margin call will be issued to bring the account back to the initial margin value.
- The Trader can reduce the position to take the account off of margin call.
- The position may be liquidated per the policies of the broker.
Each futures exchange utilizes proprietary methods for estimating the necessary margin for a given trade. Generally, this amount is based on the product being traded, the historical volatility of the product, and current trading conditions. Collectively, this process is commonly called SPAN.
Up-to-date maintenance margins for each CME product can be found here.