Margins

This is the amount of capital required to open a position in either Futures or Foreign Exchange. The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value due the leveraged nature of the margin requirement. The following information is more specific to Futures.

Initial Margin

Firstly the Initial Margin is the amount of equity that must be held in your account and set aside as a "performance bond" to enter into a trade on a contract. For traders via eTradernet's associates, this is approx 1.5% of the underlying contract value and is effectively 20% of the standard margins available to most other futures traders. Therefore this only represents a very small portion of the actual underlying contract itself. The main point to note is that because the margin deposit required to open a security futures position is a fraction of the nominal value of the contracts' being purchased or sold, security futures contracts are highly leveraged. This means that buying (or selling) a security futures contract provides the same dollar and cents profit and loss outcomes as owning (or shorting) the underlying security. However, as a percentage of the margin deposit, the potential immediate exposure to profit or loss is much higher with a security futures contract than with the underlying security. 

As detailed below, our system provides preferential day-trading margins that are not available to other individual traders. The margin on one e-mini S&P500 contract for example is approx US$800. This does however change depending on the current index level. That would mean that a US$5,000 trading account could theoretically enter into as many as 6 contracts. Under this scenario the US$5,000 has been leveraged approx 65:1 on the total account value, in that the trader is sitting on an underlying investment of approx US$310,000. Basically, that money specifically set aside as initial and maintenance margin in an account on a particular trade is leveraged to approx 65:1 - e.g. at a current S&P500 futures index level of 1036, the total contract value is US$51,800 (1036 x $50 - being the value per 1.0 or point), with an initial margin of $800 - i.e. $51,800/$800 giving approx 65:1. It is however not prudent to trade this much of the account in any one position, but for a reasonable buffer to be left in the account.

Maintenance Margin

The Maintenance Margin is that amount of equity required to be set aside for the traded contract in order to maintain the position you hold, i.e. after the positioned has been opened. Therefore, if in a loss trade, the initial margin equity amount can drop to the maintenance margin amount, beyond which you will receive a margin call. To give an example of this, say a $5,000 account was used to purchase 6 e-mini S&P500 contracts, each contract with an initial margin of $800 (6 x $800 = $4,800) i.e fully leveraging the trading account to its maximum. The maintenance margin on this contract is approx $640 (20% of the standard day maintenance margin). So the trading account would be able to sustain a loss move of 3.75 points to each contract i.e $187.50. For the trader to remain in a loss position beyond this, they would then receive a margin call.

Margin Call

Should a futures trade enter into a loss situation and the amount of equity in your trading account is no longer sufficient to cover the required maintenance margin (as detailed above), you will receive a Margin Call. This is when a trader is required to deposit further funds into their trading account in order to keep the position they currently have. If this is not done, the position can be liquidated and the net funds are then returned to the trading account. The trader can be liable for any resulting shortfall. Through the use of sensible risk management strategies including partial trading of the account and stop-losses, during the course of a normal trading day a trader would not receive a margin call. Only in the event that the trader managed their account in a reckless manner, trading more than the recommended level and not adhering to sensible stop-loss techniques, would a margin call be received. However, it should be made clear that it is possible for a trader to lose more than their initial account balance if trading in a reckless manner.

General Points Around Margin

With the system offered via eTradernet and the associated entities, only intra-day trades are taken with the use of strict stop-loss techniques. On a practical basis, this means the initial margin to enter a futures position will be all that is required to undertake the trade. If a trader were to not enter a stop-loss and therefore not cap their potential loss, or the stop-loss failed to liquidate their position, then the trader may be called upon the enter funds. Based on the recommendation of only trading a portion of the account, there will ordinarily be well-sufficient equity in the account for these purposes.

The reason that traders under this system receive lower margin requirements, is that EFT Capital have an account management system for each individual client's account. EFT supervise the trading of all clients and will enforce Management Protection Stops or close positions when a trader is trading outside of the specified rules, times etc. Therefore, the Initial Margins available to traders here are generally preferable to those available to a standard futures trader. This allows an investor to heavily leverage their account for maximum capital utilisation. This does however introduce further risk. 

The initial equity balance required to open a Futures Trading account with Peregrine Financial Group under our referred system is US$5,000, normally US$10,000 to an individual trader not coming through eTradernet. It is possible that some investors may like to enter into a joint account and pool their funds to reach the US$5,000, which is acceptable. The account will however be required to have a nominated dedicated trader to undertake the trading of the account.

If a trading account balance falls to US$1,000, the trader will no longer be able to open any futures positions and will be required to top up the account back to US$5,000.