Futures Margin and Mark-to-Market: Initial, Maintenance and Margin Calls

Futures margin is a good-faith deposit, not a down payment: you post initial margin to open a position and must keep your account above a lower level called maintenance margin. Every day the clearing house marks positions to market at the settlement price, moving cash from losing accounts to winning ones. If losses push your account below maintenance, you get a margin call and must add money back up to the initial level, or the broker will close your position.

Initial margin and maintenance margin

• Initial margin is the amount you must have in your account to open one contract.
• Maintenance margin is a lower level. As long as your equity stays above it, nothing happens. If it falls below, you get a margin call.

Exchanges set minimum margins using risk models (CME Group uses its SPAN methodology) that estimate how far a contract could move in a day or two. Brokers can and often do require more than the exchange minimum. Some brokers offer much lower day-trading margins for positions closed before the end of the session; these are not a sign that the trade is less risky, only that the broker plans to close you out quickly.

Margins change. They rise after big moves and when volatility increases, and fall when markets calm down. Always check the current figure with your broker.

Daily mark-to-market

At the end of each trading day, the exchange publishes a settlement price for every contract. Your position is revalued at that price, and the day's gain or loss is paid into or taken out of your account in cash. This daily cash flow is called variation margin. It means losses cannot quietly build up over weeks: you feel them every day.

A worked margin call on gold

Assume these illustrative figures for one gold futures contract (100 ounces): initial margin $20,000 and maintenance margin $18,000. You deposit $25,000 and buy one contract at $4,000.

Day	Settlement	Change	Day's P&L	Equity	Status
0	4,000 (entry)			25,000	Position opened
1	4,030	+30	+3,000	28,000	OK
2	3,960	-70	-7,000	21,000	OK, still above $18,000
3	3,920	-40	-4,000	17,000	Below maintenance: margin call
3			Deposit +3,000	20,000	Restored to initial margin
4	3,950	+30	+3,000	23,000	OK

On day 3 the account fell to $17,000, below the $18,000 maintenance level. The call asks you to restore the account to the initial margin of $20,000, so you must deposit $3,000. If you do not pay in time, the broker can close the position at the market price.

Now look at the bigger picture. Gold moved from $4,000 to $3,920, a fall of just 2%. That cost 80 x 100 = $8,000, or 32% of your original $25,000 deposit. This is leverage at work, and it is why you should never fund an account with only a little more than the margin.

Why margins change, and why it matters

When a market becomes wild, exchanges raise margins to protect the clearing system. In 2011, as silver prices spiked, the exchange raised silver margins several times within about two weeks. Traders who were already fully margined had to add cash or sell, and that forced selling added to the fall. A margin increase can therefore hit you twice: you need more cash just as the price moves against you.

Margin is not your risk

A common beginner mistake is to think "I only put up $2,000 of margin, so that is all I can lose". Margin covers a typical move, not every move. If the market gaps or moves several times its normal range, your losses can exceed the margin and even your whole account. With futures, you owe the broker any negative balance.

The correct way to think about risk is the money you lose if your stop is hit, adjusted for possible gaps. That is covered in the position sizing lesson.

Excess cash and interest

Only part of your account is used as margin; the rest is excess equity. Keeping plenty of excess equity gives you room to absorb losses without margin calls. Some brokers pay interest on cash balances or accept short-term government bills as collateral.

How CFD margin differs

CFD brokers do not use exchange settlement. Your profit or loss updates in real time, and the broker tracks a margin level, usually equity divided by used margin, shown as a percentage. Many brokers send a warning around 100% and automatically close positions at a lower stop-out level, often around 50%, though the exact levels differ by broker. CFD positions also pay or receive overnight financing each day, as explained in the leverage lesson.

Practical margin rules

• Use a guideline of keeping total margin in use well below your equity, for example under 20% to 30%, so normal swings never trigger calls.
• Size each trade by the money at risk to the stop, not by the margin you have available.
• Read your broker's liquidation policy: when it closes positions, in what order, and whether it warns you first.
• Watch for exchange margin changes, especially in fast markets such as natural gas and silver.