Questions about Margin Calls in Spread Betting

Q. What is a margin call?


A: Like buying shares, profits or losses from financial spread betting are only realised when you close the trade. However, with a spreadbet you must always ensure that you have sufficient funds on your spread betting account to cover not only the initial cost of the trade, but also any running losses.

Spread betting being a margin product means that you can potentally lose a lot more money than you put up. In practice when trading on margin you are effectively putting up a small portion of the money yourself and borrowing the rest from the spread betting provider. Of course, this still leaves the spread betting firm with the risk that your account will exceed the margin you have funded with them and if your losses keep accruing to the point that they threaten to exceed the margin you've deposited, the spread betting firm may demand that you increase the size of it - otherwise known as a margin call.

A 'margin call' will happen when the running losses on all your positions exceed the amount of money your spread betting provider requires you to have on account. But how do you know how much is needed?.

Let's take an example of buying £10 per point of Datacash Group PLC (DATA) when this was trading at 230p [equivalent to 1000 shares of Datacash stock]. Initially you may only need to put up £230 to open the trade. However, what happens should Datacash Group PLC announce really bad news and its share price plummets to 100p? You will have lost £10 X 130 points which is equivalent to £1300. If you don't have sufficient funds in your spread betting account to cover this loss, then your spread betting provider will call you to deposit additional funds to cover the shortfall - this is commonly referred to as a margin call. Note that you are legally bound to have sufficient funds in your account to cover any potential or actual losses and whilst different spread betting providers have different criteria and timescales for the customer to make the transfer of funds, all of them will want you to cover the shortfall pretty quickly.

Margin call and buyer beware - "Not sure who was talking about losses in DES yesterday but just had a phone call from a friend who had £100pp when they last announced a duster he lost 10k with IG, and still owes them 3k and he canít pay, they ring him every couple of months asking for the money and he gives them £100 so they donít send the bailiffs round! It was his first go at spread betting how mad is £100pp, crazy".

To avoid your positions from being liquidated, your net available funds should not go below 20% of the margin used. So for instance if Dragon Oil's stock price is 385p and you went long at £1,000 per point (equivalent of 10,000 shares = exposure of £38,500). At a 10% margin this would require an initial margin of £3,850.

When trading on margin you need to be aware of your total exposure as you must be ready to pay any losses. Trading with margin is akin to trading with borrowed money so it is very important that you place appropriate stop loss orders to protect you from losing too much (this is why some providers insist on mandatory stop loss orders). But at the same time you don't really want to place your stop loss level too close to the current price because the market can very well dip down slightly and then all of a sudden shoot back up in price, and you would have lost out on that profit just because of that little dip.

How Margin Requirements and Margin Calls Work

Let's take the case that you have put £5000 into your trading account and that using this capital you have opened up several spreadbets for a total initial margin requirement of £2000. Now depending on whether your spread bet makes or loses money:

  At open Up £3800 Down £1500 Down £3500
Account balance 5000 5000 5000 5000
Aggregate profits/losses 0 3800 (1500) (3500)
Total initial margin (2000) (2000) (2000) (2000)
Free margin 3000 6800 1500 (500)

As soon as your account has a net negative balance, your spread betting provider will ask you to deposit some more monies so that your free margin remain positive.

Tip: Don't rely on margin to stop you out-of-trades or you will end up broke (and fast!). Always leave some extra monies in your account to cover any small price movements against you and to allow for normal volatility. To limit your losses make use of stop loss orders; an instruction to your provider to close out your bet once the market price rises above, or falls below, a certain level. In the Datacash example you might place a stop loss at 190p so that if the market goes below this, your position is automatically closed limiting your loss to £400 [(230p - 190p) x 10]. Note that a normal stop loss may not protect you in the case of a market gap but you can always take a guaranteed stop loss (for which you pay a premium) which would be guaranteed to close at your pre-determined level whatever happens.

Q. About margin calls how much time do they allow before they close a position when it just dips slightly into the red?

I've noticed when my account balance dips into the red even if only a few pips an automated margin call is emailed each hour while in this position (CMC) - yesterday this happened to me but by the end of the day I was back in the black having taken no action. My question is how much time do they allow before they close a position when it just dips slightly into the red? Presumably topping up the account the same evening if still in the red is not too late?

A: A spread betting company will typically issue a margin call, but usually not immediately liquidate you if you have negative 'equity'.

To avoid being liquidated, your net funds, i.e. cash balance (not margin) must not go below 20% of the margin used.

So for example on BP (plucked out of thin air, randomly...), if share price is (almost was...) 500p and you took out a £1,000 pp position long, that is an underlying position of 100,000 shares, i.e. £500,000. At a 3% margin rate, that would require £15,000 of margin.

So, if your free margin went below 0, you would get a margin call - i.e. if you had less than £15,000 cash balance (Cash $15,000, margin used £15,000 = free margin of zero).

When (if, you understand, if...) the cash balance went below 20% of £15,000, i.e. £3,000 (i.e. BP went down by 12p, which would cost you £12,000) the position would get liquidated.

As for closing they do have the right to close but we seem to get away with small temporary positions in the red... It all depends on how volatile market is - reading their terms and conditions they do not have to inform you, they can close it at any time. Sometimes you might get away with 2 days; sometimes they close it to protect their interests. IG gives me a ring and says I have 2 days to pay it up.

Be warned however that different providers have different policies. Some spread betting companies do not permit losses to be more than the funds in your account. CMC Markets for example will liquidate your positions if an account gets to £100 credit. FXCM on the other hand uses software that will close out your positions if your usable margin gets very, very low.

Q. Can you please send me more info on provider's margin call close-out policy?

A: A margin payment is required on an account when, as a result of market movement, there are insufficient funds available on an account to support open position(s). i.e. there is a negative available trading credit.

Different providers have different terms relating to margin calls and we have quizzed a number of providers to determine how they handle margin calls:

ETX Capital: Dependant on what account you have with ETX Capital we may margin you in different ways. If you place a trade and you have the relevant margin required a stop will not be placed on the position, if you do not have the relevant margin required you will still be able to trade (subject to minimum order distance and slippage) and a stop will be placed on the trade where you funds run out, again these margin rates will vary - generally the ftse 100 stocks will be 10%, FX 2% and indices 3%.

With these accounts ETX Capital will attempt to contact you (generally email) when you are coming close to be being on margin i.e you no longer have 100% cover against the margin required. Once you fall below the level required we again will endeavor to contact you to inform you that funds are required - if further funds are not submitted we will at our discretion trim your position(s) in order to take you back to 100% cover.

ETX also offer another type of account based on trade size and funds kept on account (minimum 20k) which does not require stop losses to be in place but can be added if desired to reduce margins, these accounts, again at ETX's discretion will be allowed up to 3 days to run a margin call, if the call is below £10,000, and 24 hours if the call is over £10,000, we will endeavor to contact you to make you aware of any call using all contacts you have supplied to us - please note it is always the clients responsibility to ensure they monitor their accounts and ensure sufficient funds are in place.

LCG: Stop Out may activate to close any/all open positions if the market moves sufficiently against you so that your overall equity becomes less than the total margin requirement to maintain those positions. When the Equity on your account equals 50% of the Margin Required Stop Out will be activated. If Stop Out is activated LCG will endeavour to close the position utilising the most amount of margin first at the next available price. In the instance where trading is unavailable on that market, i.e. during a close period, then the trading platform will attempt to close the next largest margined position, and so on until there is adequate equity to cover the margin requirement.

If at any time your account balance with us (together with any available credit you may have) is not sufficient to cover in full your total margin requirement on any open bets, LCG shall be entitled to make a Margin Call. Margin is due for payment immediately upon a Margin Call being made.

Margin Calls may be made in person, by telephone, telephone answering machine message, voice mail, letter, fax, email or any other means of electronic communication. You must pay Margin immediately in the form of cleared funds in pounds sterling, US dollars or euros or such other currency as may be acceptable to LCG by not later than 4.00pm London time on the first Business Day immediately following the day on which the Margin Call is made or deemed to have been made. Margin can be paid by telegraphic transfer or by approved debit or credit card, direct debit or any other method of immediate/electronic funds transfer acceptable to LCG.

Spreadex: In such circumstances, an email will automatically be generated and sent to you on the day that your account falls on margin, informing you that a payment will be required on the account. In addition a letter will be sent to you. We will also make all reasonable efforts to contact you on the day the margin payment is required.

All margin calls in relation to sports bets must be met by 3:30pm London time on the fifth working day after the day on which the margin call is made. Margin calls, of less than £20,000.00, in relation to financial spread bets must be met by 3:30pm London time on the second business day after the day on which the margin call is made. Margin calls in excess of £20,000.00 must be paid by 9.15am on the day after a margin call is made.

CMC Markets: If you receive a margin call notice, which we send by email, then you need to deposit more funds into your account as soon as possible. CMC's close-out margin level is at 80% which means that if your total equity (value) of you account falls to being worth 20% of your margin requirements, (or if your total equity falls to £100), then we will liquidate your position. eg. If you have a margin requirement of £3,000 and the total equity of your account falls to 20% of that (ie. £600) then we will liquidate your position.

ODL Markets: If the margin call occurs in the morning, we give you until 12pm to do the necessary. If the call is after 12pm, we give you until 4:30pm. We would inform you immediately with a phone call, trying both numbers given. If unsuccessful, we send an email. Our policy is to close down the largest loss making trade first and continue until there is enough to satisfy the call.

City Index: With regards to our margin close-out policy, please refer to clause 11, "Margin Close Out Level", of the General Terms. If your Margin Level is at or below the Margin Close Out Level, that is, if your net equity is less than 80% of the margin needed on your positions, we may close all or any of your Open Positions in markets that are open, immediately and without notice at the next available price. A warning symbol will be displayed next to the Margin Level if it drops below 80%. We do state whether we may close all or any of your open positions - this is due to our not being able to pick and choose which trades to close out as we are not trading on your behalf but in an "execution only" capacity.

This policy was put in place with the intention of protecting our clients not hindering them, although as the policy can result in the closure of your positions we strongly recommend that you strictly monitor your margin level. In respect of your positions, you need to be aware of the margin requirement for your trades and you also need to be aware of the margin level at the top left hand corner of the platform, which will display a warning symbol if the Margin level drops below 80%. As soon as the margin level falls below 80%, we will close your positions.

For example if you where to hold take a long position in Barclays Rolling at £1 per point and the offer price was 316.21, as the margin of this particular stock is 30% of the trade value (you can find the margin requirement in the market information button) the margin requirement would be £94.863 ( 1 * 316.21 * 30%). This would mean that your net equity would have to be above this level to hold the trade. Also as the price of Barclays changes, as will the trade value and therefore the margin requirement, hence making it necessary to keep track of your margin level.

Delta Index: The Margin policy is that the client must always have 100% of the margin in their account. In reality the traders have discretion below 100% to close you out if you do not provide more money to support your position by end of business. However, in practice the traders will not take action until you are around 50 to 80% margin. This depends on the market conditions at the time, e.g. if a big announcement is expected and you have not indicated to us you wish to support the position you will be closed out somewhere between 50 to 80%.

Q. My spread betting provider has asked me for additional margin without any prior notice?

I've just received an email from IG Index warning that the margin on LNG is to triple to 75%? I find this news hard to believe, given that LNG has been remarkably stable (and, indeed, rising) of late...

A: I doubt that it would be increased to such a level and if necessary you could move to a more competitive company as the margin is merely a benefit to the provider as they already charge you the funding cost within the spread. Spreadex for instance are known to offer particularly favourable margins and for LNG charge 40% margin btw which is probably about right.

 ...Continues here - How Providers Price Individual Shares

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