Margin and Leverage

The good faith deposits and daily cash settlements that make leveraged futures trading possible.

Overview

Initial margin, a few percent of contract notional, is set by clearinghouses on volatility, and maintenance levels trigger top ups. Marking to market daily converts gains and losses to cash immediately, which is why futures rarely default: losses cannot accumulate. Leverage cuts both ways: a 10 percent favorable move on 5 percent margin triples equity, and an equal adverse one wipes it, with new cash due by the next morning. Brokers add house margins above exchange minimums and raise them in stress, and margin hikes in stressed markets force liquidation that accelerates the move. Managing margin liquidity is the operational heart of every desk.