- FUTURES
Futures trading on margin is approached differently: investors who buy or sell futures contracts do not borrow anything from a broker, rather a portion of the investor’s cash is set aside by a broker to act as collateral throughout the transaction. investment period.
The collateral limit value is set by the exchange on which the futures contract is traded, while the broker may require additional collateral to guarantee the trade. Futures margin can be considered as a cushion for possible losses in case the market moves against the client’s position.
The cash is used to purchase shares along with a broker loan: but for other products such as futures, individual stock futures and stock options, the cash set aside from a client’s account is considered a collateral amount to absorb the potential losses that inevitably occur when markets move adversely.
When they borrow is determined by the regulatory calculations that the broker is subject to based on rules and risk.
- Rules Based
A rules-based system applies oversight by a governing body whose role is to determine the rules surrounding what investors can do within their accounts, as the rules apply, across the board, regardless of the notion of diversification. portfolio, A rules-based system is a formula and uses a fixed percentage applied to the market value.
- Risk Based
Risk-based calculations take a broader view of an investor’s portfolio. Brokers and exchanges take into account not only the individual risk of stocks, but also the collective risk of stocks when viewed through the lens of an entire portfolio, a risk based is calculated based on simulated worst-case scenarios While market risk can never be diversified, portfolio risk can be reduced through diversification across different industries and sectors, as well as through long and short positions.
Since a rules-based method requires margin per position and does not benefit from portfolio diversification, margin requirements may be higher than in risk-based calculations.
- Normative
The United States has two regulatory regimes, each with its own governing body, the SEC oversees the securities markets, while the CFTC oversees the futures market. US Securities Margin: The US stock market is governed by the Securities and Exchange Commission or SEC, the SEC allows both risk-based and rules-based account types.
In the case of rules-based accounts, the Federal Reserve sets rules for Reg T accounts, under which investors can borrow 50% of the value of the stocks they own and can borrow the remaining 50% from their broker.
That means an investor who buys $10,000 in ABC Corporation stock will pay $5,000 and borrow the remaining $5,000 from their broker. This concept underlies the idea of initial margin, while the notion of maintenance margin is what the investor must maintain as a minimum to support the position. During the day, the investor must have in his account at least 25% of the value of the purchased securities. In the event that the value of his shares decreases, the broker will insist that the client add cash to the minimum required levels.
For those who are risk-based, Brokers offer portfolio margin, in many cases, the margin requirement may be lower than in Reg T, as the probability of loss is reduced through diversification. Risk for the investor and the trader is reduced when taking a complete view of the portfolio by including positions in different asset classes, such as stocks, ETFs, options and bonds.
A risk-based approach could mean that an investor holding shares in ABC Corporation could mitigate some of the risk by holding a compensating amount of puts. In that case, the portfolio margin requirement is likely to be lower than in a risk-based scenario. Rules, US futures margin is risk-based and determined by the exchanges, and takes the form of collateral rather than an amount that the client borrows from their broker.
The investor cannot access the collateral while the position is open.
For example,
An investor who is bullish on the price of crude oil decides to buy an oil futures contract. A crude oil futures contract, which controls 1,000 barrels of oil, could require an initial margin of $10,000. The open position is valued at the market every day. If the value of the investment increases, it is credited to the investor’s account, while if the value of the futures contract decreases, the account is debited to reflect the open loss.
The futures broker will take at least the minimum amount of collateral or margin established by the futures exchange where the contract is traded. The runner has the right to take more if he so wishes. Futures margins in the US use a risk-based approach and are generally determined by the exchanges.
Margin outside the US: The global regulatory regime contrasts with that of the US because all other countries depend on margins on risk.
Interactive Brokers is based in the US, but offers global market access to its clients on exchanges around the world. As a US clearing broker, we are sometimes required to exceed US requirements in addition to local requirements in other countries or regions.
Outside the US, there is only one regulatory regime, not one for securities and another for futures.
Contracts for Difference (CFD): They are a close indicator of stocks, however, they are treated like futures and are subject to a collateral deposit.