Maintenance Margin
Maintenance margin, also known as variation margin or 'free margin,' is the required amount of funds that must be present in an account to keep a margin trade open. Its primary function is to ensure that there is sufficient capital in the account to fund the current value of the position and to cover any ongoing losses. This requirement helps in maintaining open positions in leveraged trading, where significant losses can quickly erode initial deposits.
Purpose and Requirement
The maintenance margin acts as a financial buffer to safeguard brokers and the market against default risk, ensuring that traders have enough capital in their accounts to support the leverage used in their positions. It serves as a critical risk management tool in the leveraged trading environment.
Relation with Initial Margin
Leveraged trading necessitates two types of margin: the initial margin (or deposit margin), which is required to open a position, and the maintenance margin, needed to keep the position open. The maintenance margin requirement is typically a percentage of the total value of the open position and must be maintained to prevent the closing of the position by the broker.
Margin Calls
If the value of the account falls below the maintenance margin due to trading losses, the trader will receive a margin call from the broker. This call is a demand to deposit additional funds into the account to bring its value back above the required maintenance margin level, thereby avoiding the forced liquidation of the open positions.