Personal Finance & Money Asked on February 16, 2021
What is the difference between clearing margin and margin maintenance?
I know that an investor in a futures contract is required to keep a maintenance margin with the broker. The broker will require that the trader have a margin account. Does this mean that the money in the margin account is the broker’s money? Can’t an investor just put his own money in his margin account?
My book states that traders use leverage when they trade these contracts. Is this leverage the broker’s money?
How is the broker connected to a clearing firm? My textbook states that brokers are required to maintain margin account (which margin, the maintenance margin?) with the clearing house member and the clearing house member is required to deposit margin (known as the clearing margin) with the clearing house.
I know that if the broker isn’t himself a clearing member he needs to maintain a margin account with the clearing member. Does this mean that the broker needs to keep a maintenance margin with the clearing member and this maintenance margin is then deposited in the clearing house through a clearing member?
Is the clearing house the same for the seller and the buyer? Or are there two clearing houses?
The FRB sets an initial margin requirement of 50% for the purchase of securities and it can be met by cash and/or marginable securities. Brokers can require more. .
The FRB's maintenance requirement for securities is 25% (brokers can require more).
The initial margin requirement for futures contracts can be as low as 5%
In all cases, your assets (cash and securities) are in your account at your broker.
When you buy on margin, you are leveraging your account. At 50% margin (equities), you could buy $20k of a stock with $10k. Since you are fully margined, you'd make $2 for every $1 that the stock rises and you would lose $2 for every $1 that the stock drops. Margin can be a 'double' edged sword.
Clearing margin is the funds that a broker must have on hand to guarantee customer transactions, assuring that contracts can be delivered.
Answered by Bob Baerker on February 16, 2021
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