Futures margin: initial, maintenance, and how mark-to-market works daily

In short

I once watched a neighbor open a futures account and call it a down payment. He was half right and half wrong, and the wrong half cost him a weekend of worry. Futures margin is not a down payment on the contract. It is a good faith deposit, held to cover losses if the price moves against the position. The exchange sets the starting deposit, called initial margin, and a lower floor, called maintenance margin. Every trading day, the account is settled up to the closing price, which is called mark to market. If the balance falls below the floor, the broker issues a margin call, and the trader must add money or the position can be closed. So the habit worth building is simple: know your numbers before the first trade.

The whole of it

What it is

A friend of mine farms soybeans, and he says a handshake is only as good as the person giving it. Futures markets took that old wisdom and built a system around it. A futures contract is a promise to buy or sell something at a set price on a set date. Because a promise can be broken, the exchange wants proof that both sides can make good on it. That proof is margin.

Margin in futures is different from margin in stocks. When you buy stock on margin, you borrow money from your broker, and you pay interest on it. Futures margin is not a loan. No one lends you the rest of the contract's value. The deposit is collateral, which is a pledge of cash set aside to cover possible losses, and nothing more.

Three terms matter here. Initial margin is the deposit needed to open a position. Maintenance margin is the minimum balance the account must hold while the position stays open. Mark to market is the daily process of adding gains and subtracting losses from the account, based on the day's closing price, which the exchange calls the settlement price.

How it works

If you have ever kept a running tab at a hardware store, you already understand the idea. The store does not wait a year to learn what you owe. Futures work like that tab, only the tab is settled every single day.

Here is the daily rhythm. A trader opens a position and posts the initial margin. At the close of each trading day, the clearinghouse, which stands between every buyer and seller, compares the day's settlement price to the prior one. If the trader's position gained, cash is added to the account. If it lost, cash is taken out. The gain or loss is real cash, moving that same day.

Now the floor comes in. The account balance is allowed to drift down, but only to the maintenance margin level. If it falls below that line, the broker sends a margin call. The trader must then restore the account, and the usual rule is to bring it back up to the initial margin, not just to the maintenance level. That detail surprises many people. A small dip below the floor can demand a large deposit.

The trader has a short window to respond, often by the next morning, though the broker sets the exact deadline. Brokers may also close positions without waiting, and the account agreement usually allows it. When a trader fails to meet the call, the broker can liquidate, which means sell the position at the market price. The trader remains responsible for any shortfall.

Because margin is tied to price swings, it is not fixed forever. When markets get jumpy, exchanges can raise the requirements. Brokers can also ask for more than the exchange minimum. So a margin figure that held last month may not hold today.

The numbers, and where to find yours

You have probably wondered where anyone finds the actual figures. The answer is the exchange itself. The CME Group publishes margin requirements for each contract on its website, and they are updated as conditions change. The initial margin for a given contract is set as a dollar amount per contract, not as a percent of anything you choose. The maintenance margin is a separate dollar amount, lower than the initial one.

Your own broker may ask for more than the exchange does. Many brokers add a cushion, and some charge higher day trading or overnight rates. So the number that matters to you is the one on your broker's margin schedule. Look it up before you trade, and check it again when markets are moving fast.

For the rules that govern the whole arrangement, the Commodity Futures Trading Commission, or CFTC, is the federal regulator. It publishes educational material for customers. The National Futures Association, the industry self regulator, does the same. Those two pages are good places to confirm how margin calls and liquidation work under the rules.

If a figure is set by law rather than by an exchange, it will be filled in by the site, such as the current figure, which the official source publishes each year. Exchange margins, though, are set by the exchange and change on their own schedule. Treat any number you read in an article, this one included, as old the moment you read it.

A worked example

A woman I know, Dana, wanted to understand margin before risking a dime, so she wrote out a made up trade on paper. Her numbers are plain ones, chosen for easy math, and they are not real exchange figures.

Say one contract has an initial margin of $5,000 and a maintenance margin of $4,000. Dana deposits $5,000 and opens one contract. Her account balance on day one is $5,000.

On day two, the price moves against her, and the loss on the contract is $600. Her balance goes from $5,000 to $4,400. That is above the $4,000 floor, so no call comes. She is fine, though her cushion is thinner.

On day three, the price moves against her again, and the loss is $700. Her balance goes from $4,400 to $3,700. Now $3,700 is below the $4,000 maintenance level, and the broker issues a margin call.

Here is the part that catches people. To restore the account, Dana must bring the balance back up to the initial margin of $5,000, not to $4,000. The deposit she owes is $5,000 minus $3,700, which is $1,300. If she had only topped up to the maintenance level, she would have owed $4,000 minus $3,700, which is $300. The gap between those two answers is $1,000, and it is the reason to read the broker's terms with care.

Suppose instead that day three went her way, and the price rose for a gain of $500. Her balance would go from $4,400 to $4,900. That cash is hers, and she could withdraw any amount above what the account requires.

Where it goes wrong

I once heard an old trader say that margin does not make you wrong, it just takes away your time to be right. That line has stuck with me. A price can wander against you for days before turning back. But the account has to cover the tab each night, and a trader who cannot pay may be forced out right before the turn.

The first trouble is thinking of margin as the most you can lose. It is not. Losses can exceed the deposit. If a price gaps sharply overnight, the account can go negative, and the customer owes the difference to the broker. The deposit is a starting cushion, and the exposure is the full size of the contract.

The second trouble is surprise. Exchanges can raise margin requirements quickly, and a position that was comfortable on Monday may need more cash on Wednesday. Brokers can also act fast. Many account agreements let the broker close a position without a call at all. Reading that clause ahead of time is worth the quiet hour it takes.

The third trouble is the cash itself. Daily settlement means real money leaves the account every day losses occur. A trader who keeps only the bare minimum has no room for a bad week. Gains and losses are not paper figures here. They are paid or collected before the next session opens.

Questions to answer before you leave this page

Do you know the current initial and maintenance margin for the exact contract you have in mind, and did you read them from the exchange and from your own broker? If the price moved against the position for three days in a row, could you add cash by the next morning without strain? Have you read the part of your account agreement that says when the broker may close a position without calling you first? Do you understand that a loss can be larger than the deposit, and that you would owe the difference? Can you work out, with your own numbers, how much you would owe if the balance dropped below the floor? And have you looked at the education pages of the CFTC and the National Futures Association to check that you have the rules right?