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| Margin Call |
A margin call conforms to a call, in the form of an electronic message, or a phone call, from an investment professional/broker to a client, or either from a clearinghouse to one of its clearing members, asking for the deposit of cash or marginable securities to meet regulations governing margin accounts.
The investor or the clearing member must deposit additional cash or securities so that the margin account is brought up to the minimum maintenance margin. This is sometimes known as fed call.
At the close of each trading day, the value of securities in the investor’s account is verified and compared to the initial and maintenance margin requirements set forth by the exchange.
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If the value of securities in the account is larger than the initial margin, then the difference must be removed or used to purchase extra contracts (this surplus is recognized as cash accessible among practitioners).
However, if the value of the securities is less than the required maintenance margin as set forth by the exchange, a margin call occurs. the amount of the call is the difference between the value of securities and the initial maintenance requirement.
All outstanding margin calls must be addressed instantly. The trader is required either to deposit additional money in the account or to sell part of his securities, liquidating his position. Accounts having an outstanding margin call are not permitted any further opening transactions or cash withdrawals.
If a trader does not meet a margin call, the broker has the right to sell his securities (even without consulting the trader) to increase the trader’s account balance until it is above the maintenance margin. Not only traders, but also clearing members receive a margin call if one or more of the securities bought decreased in value below the maintenance margin.
For a review of the margin call process see also Dufie (1989) and Hull (2005). A margin call is part of the portfolio margining system, one of the most important financial safeguards, ensuring integrity to the financial system, aimed to avoid, or at least limit counterparty risk.
