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Hi there - I know you want to pass the series 3 Exam to become a commodity broker. I want to share a few tips that will help you to pass in your first attempt. Write to me and I will send them to you directly. Milton
MARGINS
Often when we hear the words "margin cal1" we tend to think of it as the EXTRA money we must deposit because the positions we are currently in are losing money. This is many times the case, yet there are actually two different kinds of margin calls. The term "margin" applies equally to both, and for the exam you must be able to distinguish between the two.
Initial margin. (Performance Bond)
The initial or "original" margin occurs at the end of a trading day whenever a new position was entered (long or short), during the trading session. Initial margin is set by the exchange; it varies from commodity to commodity, and is not a down payment, but a "good faith" bond. Usual1y the original margin will represent about 5 percent of the total value of the contract. Depending upon the volatility of the price, and the price level, the exchange may raise or lower initial margin requirements whenever the board of governors deems necessary.
If, therefore, the trader enters a long or short position in the market, that trader wil1 be "on" original margin call.
The customer may meet margin calls in several ways. The usual way to meet a margin cal1 is with cash. It is acceptable to meet the margin cal1 with Treasury Bil1s. General1y, if a cal1 is to be met with T-Bills, the firm will require the client to first deposit the money for the purchase of the bill. The firm then buys the bill for the customer, and grants a 90% "loan value" (the amount of the face value that can be used for trading commodities). There are also other items that have an allowable loan value. These items and the associated loan values are; T-Notes 80%, T-Bonds 80%, and Stocks 75% (when stocks are used for margin, it is called "taking the discount"). Many firms still allow only the T-Bill, but the others have been approved for use.
The individual firms may require more initial margin per contract than the exchange, but never less.
Maintenance margin call:
At the end of each day, all accounts are "marked-to-the-market". This just means that if, for instance, a client had gone "short" gold at a contract price of$360, and at the end of the day the contract was quoted at $370, the account would have an unrealized loss of $10/oz. or $1,000. Even though the client has not actually taken the loss yet, the account will still reflect the decrease in equity.
After the accounts are marked to the market, each is reviewed for possible maintenance margin calls. If the equity in an account is LOWER than 75% of the required (original) margin, the client will be placed on a maintenance margin call.
Once a maintenance call is "triggered", the client must restore the account to the full original margin.
EXAMPLE: LONG I SEP SILVER @ $6.50.
The original margin is $3,000. 75% of the original margin is $2,250, so this then is the maintenance margin trigger price. The silver contract size is 5,000 ounces. If the price of silver closes the day at $6.40 per ounce, the debit will be $500. The client would be at an equity level of $2,500, and so NO maintenance call will result. If the price of silver settles the following day at $6.30, the account will be marked to the market with an unrealized loss of $1,000 that will put the equity at $2,000 and trigger a maintenance call. The client has a specified period of time (determined by the firm) to bring in a check for $1,000. The client must return the account to the initial margin if a maintenance call is triggered.
The market CANNOT take a client off a maintenance call. In other words, if on the day after this client is on call - and the client has not brought in the check - the market closed at $6.50, the client must STILL bring in the maintenance margin.
Excess Margin: If in the example above, the silver price closes never did drop but instead closed at $6.80, the account would show an unrealized gain of 30 cents or $1,500. In this case the client may, if he chooses, use the equity to enter new positions, or he may even withdraw the excess.
Responsibility: The ultimate responsibility for collecting margins from the customer lies with the representative handling that account.
Comparisons: Equity more than the required (initial): If the equity exceeds the initial requirement, the customer may use the equity to add new positions, or withdraw the excess.
Equity under the initial, but at or greater than the maintenance trigger level: The client may not add new positions unless the client deposits more money, or liquidates some other positions to free-up margin money.
Equity LESS than the maintenance level: The client must restore the account to the original margin. This can be done by bringing in more money, or by liquidating enough positions to cover the margin call.
MARGINS BETWEEN MEMBERS AND CLEARING CORPORATIONS
The original margin calls of the firm may be met with cash, Government securities, or stock of the clearing corporation.
Maintenance (variation) calls between the member firms and the clearing-house can only be met in cash, or by liquidating positions.
On the Chicago Board of Trade, members must only meet the margin call on the NET positions. In other words, if a firm has clients in 100 long gold contracts, and 102 short gold contracts, the firm will only meet margin call for 2 contracts.
The New York Mercantile and the Chicago Mercantile require firms to meet margin calls on ALL positions without netting. The client must meet margin calls on ALL positions. There are lower requirements for bona-fide spreads.
