A complete guide to maintenance margin

Trading with leverage can be a worthwhile way to increase your position’s value, but it comes with many risks. In this article, we will explain what maintenance margin is in relation to your account and how it can affect your trading, as well as running through our own maintenance margin requirements at ALFATRADING-MARKETS.

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What is a maintenance margin?

A maintenance margin is the least amount of money a portfolio account must have in order to keep a leveraged position open. If an account falls below the maintenance margin level, the trader will be closed out of the position. At ALFATRADING-MARKETS, our maintenance margin level is 50% of the initial margin.

An initial margin is the amount of capital required in the account to make a trade in the first place. If a position drops to 80% of the initial margin level, a margin call is triggered, telling the trader that they need to add more money to the account before they hit the maintenance margin level where their position will be liquidated.

Maintenance margin is only applicable when spread betting or trading CFDs using margin, which is the same as leverage.

Why does a maintenance margin exist?

Maintenance margin requirements aim to protect both the trader and the broker from excess losses, which, in turn, protects the whole financial system. Making a trade is an agreement with a party on the other side of the transaction. Each party needs to be able to hold up their end of the bargain and have enough capital to cover any losses they incur.

What’s the difference between initial margin and maintenance margin?

An initial margin is the minimum amount of capital required to open a position for a specific asset. Since the account balance may fluctuate based on the profit or loss of the position, some leeway is given so that the account can fall slightly below the initial margin level without causing a margin call.

The maintenance margin level is a close-out level where the account balance is too low for the position or positions held open. It requires more funds to be added before hitting this level, or trades need to be closed. A maintenance margin should always be lower than the initial margin.

As an example, consider a stock trade with us that has a 20% initial margin requirement. If you buy a stock for $100, then you need to have at least $20 in free cash (not being used at margin by other positions) to initiate that trade.

The maintenance margin requirement is half of this, so if the account balance hits $10, the maintenance margin level has been hit and the position will be closed. However, a margin call could happen before this at $16 (80% of the initial margin) and the trader will be asked to top up the account in order to avoid hitting the maintenance margin level.

How is maintenance margin calculated?

The formula for calculating a maintenance margin requirement is usually set by an exchange, or it may be set by the broker for spread betting and contract for differences (CFDs), as well as over-the-counter (OTC) products.

For example, suppose the maintenance margin is set at 50%. If you’re required to have £100 in initial margin to make a trade and the account balance drops to £50, then a margin call will be issued before the value of the account falls to this level, in order to bring the account back up to £100. If a trader wants to keep the position open, they must deposit the required funds, or close other trades before the maintenance margin level is hit, otherwise the trade will be closed.

A maintenance margin example

Assume a trader opens a buy position for the GBP/JPY currency pair with the expectation that the price of the pound will rise against the yen. They place a trade that has a total position value of £5,000, which is how much currency they bought at a price of ¥149.00.

The trader is not required to have £5,000 in their account to make this trade. They only need 3.3% – or £165 – of that when trading with ALFATRADING-MARKETS in the UK. This is the initial margin required to open a position. As long as the trader has at least £165 in the account that is not being used as margin for other trades, then they can open the £5,000 GBP/JPY trade.

A maintenance margin rate with us is set at 80% of the initial margin. If the balance of available funds falls below £132 (calculated as 0.8 x £165), then the trader will need to deposit additional funds to bring the available balance in the account back up to a minimum of £165.

Let’s also assume the trader has £200 in their account when they make the trade, but it is currently losing £70. Based on this account revaluation, their account value is down to £130, which is below the 80% margin call threshold (which sits at £132). The trader is alerted that they need to top up their account, but the trade is still continuing since the maintenance margin level is £82.

If the price continues to drop and the trader is now losing £120, their available cash would now only be £80, which is below the maintenance level, and therefore they would be closed out of the position. One of the risks of spread betting is that you may hit the maintenance margin level and be automatically closed out of your trade, which is why it’s important to understand where this level is and how you can appropriately size your trades and manage your risk.

What can I do to avoid hitting the maintenance margin?

To avoid getting a margin call and then hitting the maintenance margin, you could keep in mind the following things:

Keep leverage to a reasonable level by managing your position size. A large position relative to your account size means that a small change in price can result in large percentage changes in the account value.
Strive to have more capital in the account than the minimum amount required. For example, if a position requires £100 of margin, having double or triple (or more) of that in the account may reduce the chances of getting a margin call.

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FAQ

Is the maintenance margin the same for all instruments?

When you trade with us, the maintenance margin is 50% of the initial margin for all markets and instruments. Browse our range of markets on offer.

Is the maintenance margin the same for CFDs and spread betting?

Margin requirements are the same for CFDs and spread betting, assuming it is the same instrument. Learn about the differences between spread bets and CFDs before opening an account to find the product most suitable for you.

Can I lose all my maintenance margin if the market is too volatile?

It’s possible to lose all funds when trading with leverage. In volatile conditions, the price can move so quickly that there is no time to add funds. If the price continues to move unfavorably, positions will be closed to limit the risk.

What are ALFATRADING-MARKETS’ initial margins?

To view our initial margin requirements for each asset class, visit our spread betting margins and CFD margins pages for full details.

Disclaimer: ALFATRADING-MARKETS is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by ALFATRADING-MARKETS or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.