ES Emini Trading: How does a Futures Margin Account Work

Published: 24th December 2009
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When you establish a futures account with a brokerage that specializes in futures trading, you will be asked to deposit a sum of money to cover your margin and commission expenses. The actual size required to establish a futures account varies from brokerage to brokerage, with some firms requiring as little as $3500 and others requiring $10,000 or more. The opening balances are at the discretion of actual futures brokerage.

It gets interesting after you deposit the money with the brokerage firm because they do not actually hold your deposit. This deposit is called your initial margin. That money is deposited with a clearing house to cover potential futures losses in the futures positions you will take throughout the course of your trading. Further, the amount of your deposit will come with some restrictions as to how many contracts you can trade based upon the size of your account. Every futures brokerage and corresponding clearinghouse use rigorous risk management policies to assure that both you and they do not get into a position where you have greatly exceeded your initial deposit. Therefore, the restrictions on the number of contracts you can trade. In addition, most futures brokerage houses have a daily loss limit set on your account. (Which is something you will hopefully not ever have to discover), but that number is usually about 50% of of your account value.

There are a number of formulae the clearing houses (sometimes referred to as clearing corporations) use to calculate just how much margin is required for each contract and the type of trading in which the trader is going to engage. The margin for day traders is much lower than traders who expect to hold positions overnight. Additionally, the margins on the emini contracts are much lower than the margin on the full contracts. There are a number of anachronisms used to describe these formulae, like SPAN, which is used by the Chicago Mercantile Exchange, and OCC which is used by several smaller exchanges. They are all engineered around a basic question that might be word like this:

What is the potential loss that this futures brokerage might sustain on its portfolio with a 99% confidence and over a period of 2 days? The formula is then refined to reflect how many times traders lose more than 1% in a 2 day period, which can vary from trader to trader depending upon the traders skill. It is a tough number to calculate and I suspect the actual formulation is little more than a "best estimate." At least, that is my opinion.

Needless to say, your futures broker is going to be very interested in your account balance as you trade and will advise you when you may be over trading or depleting your account at an unusually high rate.

There is a second kind of margin that is calculated on a daily basis. This margin is called mark-to-market margin and is money removed from your account to cover losses incurred during your daily trading, should you have had a day you lost money. On the other side of the coin, money that you earned through profitable trades is credited to your margin account. The important thing to know about mark-to-market margin requirements is that it is calculated on the positions you traded that day and the prices at which you closed your positions. Obviously, if you had a losing day, that loss, plus commissions is going to be deducted from your trading account to cover the difference between your initial balance and your trading activity during the course of the day.

Most brokerages require a minimum amount of money in your futures trading account, and if your losses should bring your account below the brokerage minimum, you will be asked to put more money in your account before you can resume trading. This restriction benefits both parties, futures brokerage and trader, so that the trader does not run up excessive losses for which he will be held responsible.

What is the reason for all this emphasis on Margin accounts in the futures industry? Futures contracts are highly leveraged trading instruments and the potential for loss, expecially with a new trader, or a careless trader can result in catastrophic losses. Margin accounts make sure that neither the futures brokerage or the trade find themselves in an unmanageable financial situation that requires extra monies the trader may or may not have at his disposal.

Of course, all this talk of margins is centered around controlling losses and only reinforces the theme I write often about: Manage your trades wisely and never trade without stops in place. Careful and prudent trading results in profitable trading and margin accounts will never be an issue, unless of course you want to remove some money from your account for some purpose. I always enjoy withdrawing earnings from time to time.

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