Maintenance margin money denotes the minimum level to which the margin is allowed to fall in the sequel of a loss.
If the balance drops below this, one has to deposit the:
a. Initial margin amount
b. Variation margin amount
c. Maintenance margin amount
d. Initial as well as variation margin amount
1 Answer | Add Yours
Maintenance margin is not the minimum margin requirement, with reference to leveraged trades in securities or derivative instruments.
When traders take up positions where the funds to buy securities or the securities themselves have to be borrowed, they are required to have in their accounts a sufficient amount of money or securities that can be used as a collateral. This is the initial margin requirement which determines if the trader can enter a particular position.
Once a position is entered, to minimize defaults, regulated financial markets have a system where the prevailing market price at the end of each day is compared with the initial price at which the securities were bought or sold. The difference in price can result in a profit or a loss made at the end of each day. The trader can withdraw funds if a profit is made or has to deposit additional funds if a loss is made. This is called maintenance or variation margin.
If a loss is being made by a trader and the maintenance margin cannot be deposited most brokerages allow the margin value in the trader's account to decrease till a minimum margin value is reached. This is done to avoid the liquidation of positions immediately in volatile markets. A drop in margin below the minimum margin requirement results in the liquidation of the position and the trader has to bear the losses made.
With reference to your question if the margin drops below the minimum margin requirement, the trader has to deposit funds to raise it so that the minimum margin requirement is satisfied.
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