Margin Call There are two types of margin calls and both involve a demand from a broker / dealer to either deposit additional equity (in the form of a cash deposit or marginable securities with sufficient loan value) and / or to close enough existing positions to satisfy the call. The first type of margin call occurs when a new position is opened with insufficient overnight buying power. This is known as a Federal or Reg T (RT) call. The second type of margin call involves total equity which is no longer sufficient to maintain the positions that have been opened. This is known as a Required Maintenance (RM) call.
Overnight Buying Power (ONBP) The amount of funds you have to open a new position and hold it overnight. In the majority of cases, beginning of day ONBP is based on two times your maintenance excess (equity – equity requirement). Closing positions can increase your ONBP intraday. It is sometimes referred to simply as ‘Buying Power’.
Day Trade Buying Power (DTBP) The amount of funds you have to place day trades. Beginning of day DTBP is 4 X margin maintenance excess from the end of the previous day. This figure cannot be increased intraday, and is fixed at the start of the day. Closing positions opened that day will replenish DTBP, but never greater than the start of the day DTBP. Closing overnight positions will not replenish DTBP.
Required Maintenance (RM) Call This type of Margin call is the most common type issued. It occurs when the value of the security moves against the customer (price drops when long the stock or price increases when short the stock). All securities have a margin maintenance requirement (25%, or more stringent, up to 100% of the market value), and this type of call simply means that the current equity in the account is no longer sufficient to satisfy the total maintenance requirement of all the positions held. The call can be met in many ways. (1) You can deposit money in the amount of the call. (2) You can deposit securities valued at 1 1/3 times the amount of the call. (3) You can close marginable securities at 4 X the amount of the call. (4) You can sell non-marginable securities at the full amount of the call. Or, (5) the value of the marginable positions move in the account’s favor to the point there is no longer maintenance call. This call is also referred to simply as maintenance call.
Hypothetically, let's say you purchase $20,000 worth of securities by paying $10,000 yourself and borrowing $10,000 from SogoTrade. If the market value of the securities drops to $15,000, the equity in your account falls to $5,000 ($15,000 - $10,000 = $5,000). Assuming a maintenance requirement of 25%, you must have $3,750 in equity in your account (25% of $15,000 = $3,750). So, in this example, since the $5,000 of equity in your account is greater than the maintenance requirement of $3,750, you are not in a maintenance call. But let's say the maintenance requirement is 40% instead of 25%. In this case, your equity of $5,000 is less than the maintenance margin of $6,000 (40% of $15,000 = $6,000). Here, you would be issued a $1000 Maintenance Call. SogoTrade will use best efforts to notify you; however, if you don’t meet the call, we have the right to close positions at our discretion to satisfy the call.
Reg T (RT) Call This type of margin call occurs when you open a position that exceeds your overnight buying power and then hold that position overnight. This call is a request for you to deposit additional equity to prove to the Fed you had the financial capacity to establish such a position. Reg T Calls can only result from opening transactions. Unlike a Required Maintenance call, equity depreciation cannot generate a Fed Call. Fed calls should be met with a new deposit, rather than by closing positions; although closing sufficient positions will satisfy a Reg T (Fed) call. If you close a position to meet a Reg T call, a Liquidation Violation may be charged to the account. These are also known as ‘strikes’. At SogoTrade, you are given 3 ‘strikes’ in your margin account before a 4th one would restrict the account to liquidation only for a 90 day period. Just remember, you can be charged a Liquidation Violation if you sell/close a position to cover a Reg T Call. This call is also sometimes referred to as a Federal (Fed) call.
Hypothetically, let’s say you deposit $5000 cash to fund your account. You now have $10,000 ONBP and $20,000 DTBP (4 X your maintenance excess, as you have no positions in this example). You then place an order to buy 1000 shares of XYZ @ $15 per share and hold the position overnight. The principal amount is $15,000. You have overspent your ONBP by $5000, and would be in a $2500 RT Call ($15,000 X .5 = $7500 requirement). You can meet this call by depositing the entire amount in cash, or you could deposit securities with a value twice the amount of the call to meet it. Just remember, you can be charged a Liquidation Violation if you sell/close a position to cover a Reg T Call.
Day Trade Call (DT Call) A Day Trade Call occurs when there is insufficient Day Trade Buying Power (DTBP) to satisfy initial requirements on day trade transactions. This means you have exceeded (overspent) your beginning DTBP for the day, and then day traded (didn’t hold the position overnight). Day Trade calls can only be met with a deposit of new cash (or fully paid securities). You cannot sell securities to meet this type of call. New monies deposited to meet a DT call must stay in the account for at least two business days before withdrawal (at Sogotrade, if made by ACH, there is a 5 business day hold).
Hypothetically, let’s say you start the day with $5,000 of ONBP and $10,000 of DTBP. You then close $15,000 of a marginable position. Now you have $20,000 ONBP and the DTBP remains at $10,000 (note that your ONBP exceeds your DTBP in this scenario). You then place an order to buy 1000 shares of XYZ stock at $15 per share. The principal amount for this trade is $15,000. You have overspent your DTBP by $5000, but you have not exceeded your ONBP. In this case, if you were to sell the position that same day, you would have a $5000 DT margin call, since you overspent your initial DTBP and then day traded. If you were to hold the position overnight, no DT call would be issued.
Equity Maintenance (EM) Call An EM Call occurs when the equity in a Pattern Day Trader (PDT) account (see section on Day Trading) falls below $25,000. The EM call is the additional equity required to get the PDT account back to the required $25,000 so day trading can be permitted again. This call can be appreciated out of or a deposit of cash and / or securities in the amount of the EM call can satisfy it. A Margin account with 4 or more day trades in any rolling 5 business day period is considered ‘pattern’. If a PDT account begins the day with less than $25,000 equity and executes a day trade, the account will be closed at the clearing firm and restricted to closing transactions only for 90 calendar days. There is no way to lift this restriction. For example, depositing funds or closing positions cannot reopen a PDT account closed for day trading while the equity was below $25,000. While in an EM call, the account can still use the overnight buying power to open a new position and hold it overnight.
Good Faith Violation (GFV) This type of violation occurs in Cash Accounts ONLY. We are listing it here for informational purposes, as investors sometime get several of these before they decide for themselves that a margin account may actually suit their trading habits better.
A GFV is issued when a position is opened using unsettled funds and then closed before the funding sale has settled. Settlement for a stock trade is trade date plus three business days. An easy way to remember this is T + 3. Settlement on option trades are T + 1.
Customers can receive 4 GFV’s in a 12 month period; however, they should try to be avoided in the first place. When an account is issued its fourth GFV within that timeframe, the account will be restricted to settled funds only (intraday sales will no longer increase overnight buying power) for one year. A fifth violation will result in the account being closed (restricted to liquidations only).
Hypothetically, let’s say on Monday, April 10, a customer sells 100 settled shares of XYZ stock which generates proceeds of $5,000. This sale will settle on T+3, which is Thursday, April 13. He then uses those unsettled funds to purchase shares of ABC. On Wednesday, April 12, the customer sells the shares of ABC (that he is now selling before the funding sale of XYZ from April 10 will settle on the 13th). This customer will be issued a Good Faith Violation because he didn’t hold the purchase made with the unsettled funds until the original XYZ sale had settled.
Some Margin account risks… and tips to avoid Margin Calls.
Cross reference these points with our Education section on ‘Summary of Key Facts to Understand’
- You can lose more funds than you deposit in a margin account.
- The firm can force the closing of positions in your account.
- The firm can close positions without contacting you.
- You are not entitled to an extension of time to meet a margin call.
- Make sure you fully understand how a margin account works. Margin accounts are not suitable to all Investors. Cash accounts are not subject to margin calls. It is important to take time to learn about the risks involved in trading securities on margin. Consult with your broker about any concerns you may have with your margin account.
- Know the margin rules. To learn more, read FINRA Rule 4210 .
- Know your firm's margin policies. Read our margin agreement and margin disclosure statement.
- Be careful when trading securities with higher margin maintenance requirements. It is possible to receive inflated buying power figures when doing so. Also, firms can increase requirements at any time, putting you at greater risk to be put into a call.
- If using margin, you may not want to use all of your available buying power to trade securities. For example, you may want to keep some money in a separate account so that you can promptly meet a margin call, if issued. This way, you leave your account some cushion should the value of the securities move against you.
- Manage your margin account. Margin accounts require monitoring. Review the price of the securities in your margin account on a daily basis, if you can. If you see that the securities in your account are declining in value, you may want to consider depositing additional cash or securities in an attempt to avoid a margin call. If you receive a margin call, act promptly to satisfy it. By depositing cash or closing positions that you choose, you may be able to avoid your firm liquidating or selling securities it chooses.
Also of importance, you don’t have to maintain a debit balance when you utilize a margin account. You do not have to take advantage of any extra buying power, greater than your cash balance offered. You can choose to ignore the extra buying power and only trade within your cash balance. Only debit balances held overnight will be subject to margin interest.
It is important that investors take time to learn about the risks involved in trading securities on margin, and investors should consult their brokers regarding any concerns they may have with their margin accounts. See more at: http://www.finra.org/investors/purchasing-margin-risks-involved-trading-margin-account