Maintenance margin call basics

A maintenance margin call is issued when the equity in your account falls below the maintenance margin requirements. There are primarily two scenarios that could cause this:  

  • Market depreciation: If the equity in your account drops below the minimum maintenance requirement set by your brokerage, it could trigger a maintenance margin call. Market depreciation is usually the most common cause for lower equity, but any fees or interest charges could also reduce your account equity.   
  • Higher Margin Requirements: The maintenance margin requirements for your portfolio could also increase due to the following:  
    • Rebalancing: If securities with higher margin requirements are underweight in your portfolio, relative to securities with lower requirements, rebalancing while borrowing could trigger a margin call. This most commonly happens when you modify your portfolio to contain higher requirement securities.  
    • Margin Requirement Changes: Your brokerage or clearing firm can increase the margin requirements on specific securities based on volatility and other factors.  

Let’s look at these scenarios using an example:  

Say your account value is $50,000, which consists of $49,000 invested in securities and a $1,000 cash balance. Then with the standard 25% maintenance margin requirement rate you borrow $10,000 using margin. 

maintenance margin call equation 1

In the above example, the account has $40,000 of equity compared to the maintenance requirement of $12,500 resulting in $27,750 of excess equity.  

Scenario 1: Market Depreciation  

When you know the maintenance margin requirement rate of a portfolio (in this case 25%), the following formula will tell you exactly how much the portfolio value would have to depreciate to trigger a margin call:  

(Margin loan balance-cash balance) / (1 – maintenance margin requirement rate)   

In our example, that translates to:   

($10,000-$1,000) / (1 - 0.25) = $13,333.34  

This means that the $49,000 portfolio value would have to drop below $12000 to trigger a maintenance margin call (which is over a 70% drop!).   

Let’s look at the numbers right before the maintenance margin call when the portfolio value drops to $13,000  and the cash balance stays uninvested at $1,000. 

maintenance margin call equation 2

We see that maintenance excess equity remains positive; therefore, no maintenance margin call is issued.  

When the portfolio value drops to $11,000 (below the previously calculated $12,000 threshold), we see that the maintenance excess equity is negative and a margin call for $750 would be issued. maintenence margin call equation 3

In the above example, you would need to deposit cash or sell securities to meet the margin call. 

Scenario 2: Higher Margin Requirements  

Now let’s review an example where the portfolio value does not change, but you update your portfolio to include highly volatile stocks with a 100% maintenance margin requirement rate and rebalance.  

maintenence margin call equation 4

In this case the maintenance requirement increases from $12,500 in the first scenario to $50,000, causing the maintenance excess equity to drop and resulting in a $10,000 maintenance margin call.  

If you have further questions, please contact us. 

  

All investing involves risk, including the risk of losing the money you invest. Borrowing on margin can add to these risks, and you should learn more before borrowing. M1 Borrow available on margin accounts with at least $2,000 invested. Not available for all account types including retirement, custodial and some trust accounts.  Margin rates subject to change.  

All examples above are for informational purposes and should not be considered an offer to buy or sell certain securities. M1 does not provide investment advice. 

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