Investors using futures contracts must post margin (in the form of cash or marketable securities) in an account maintained by the broker who trades on behalf of the investor. Margin acts as a buffer to absorb subsequent losses that may be incurred on the open futures position. The margin amount is determined base on exchange rules and regulations (and the purpose of the futures position (trading, risk mitigation, speculation). Futures margin provides a broker with collateral or performance bond by which to ensure a futures trader honors the obligations arising from the contract.
In normal conditions, taking a position in a futures contract will require the posting of initial margin, in addition to maintenance margin which is used to top up the initial margin again if the futures position loses value taking initial margin below its normal level. Futures positions are marked to market on a daily basis, such that the margin account is debited or credit, depending on the marking-to-market process. This mechanism helps to prevent unrealized losses from accumulating, and consequently ensure smooth functioning for the financial system.
When the balance of margin account falls, the broker would send a margin call to the futures position holder, asking him to restore the margin to its original level. Failure to do so may lead the broker to close out the futures position by offsetting the contracts outstanding.
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