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Special margin requirements, sometimes referred to as house margin requirements, are margin trading equity or collateral requirements that are higher than the standard margin trading minimums required by federal regulators.
Margin trading involves borrowing money from a broker-dealer to acquire assets. The minimum initial margin required to buy assets on margin is 50% of the purchase price, and the maintenance margin required to maintain open positions is 25% of the securities’ value. However, brokerage firms often establish elevated margin requirements — often ranging between 60% to 100% for initial margin and 30% to 50% or higher for maintenance margin — depending on risk factors such asset class, market volatility, or account concentration.
Key Points
• Margin trading involves using securities and equity in your account as collateral to amplify buying power, though it also involves paying interest on borrowed funds.
• Special margin requirements are set above the standard 50% initial margin and 25% maintenance margin rate, indicating a need for higher collateral in the account.
• These requirements are often applied to assets that are considered particularly risky, such as by being more volatile or illiquid or involving concentrated positions.
• The Standardized Portfolio Analysis of Risk (SPAN) system helps calculate these requirements by assessing one-day risk in futures and options markets.
• Brokers issue margin calls when account equity falls below the required percentage, necessitating additional deposits or liquidation by the account holder.
What Are Special Margin Requirements?
Special margin requirements are higher than standard margin requirements — above the 50% initial margin required by the Federal Reserve’s Regulation T and the 25% maintenance margin rate required by Financial Industry Regulatory Authority (FINRA). Higher margin rate requirements mean investors must maintain a higher equity amount in their account when trading on margin.
Margin loans involve using cash and securities in an account as collateral to purchase assets. With margin trading, investors can use leverage to attempt to amplify their potential returns from a position, though it comes with the risk of seeing outsized losses, as well. Investors must also pay interest on borrowed funds. For anyone interested in trading on margin, it’s important to understand the rules for margin accounts and which assets may have special margin requirements.
There are many rules and regulations governing trading on margin. Similar to the initial margin and the maintenance margin required by the Fed and FINRA, respectively, FINRA and the New York Stock Exchange (NYSE) require at least $2,000 of cash or securities to be deposited before an investor can trade in a margin account.
Special margin requirements often accompany purchases of highly volatile stocks, so even a slight drop in the price of these stocks may trigger a margin call. Brokers might also issue special margin requirements on concentrated positions in an account. Leveraged positions and other factors might also trigger special margin requirements.
Brokers don’t issue special margin requirements haphazardly. They may use an analysis of historical volatility, along with SPAN (Standard Portfolio Analysis of Risk) margin. SPAN margin is a system used by exchanges worldwide to determine margin requirements, based on an assessment of one-day risk for a trader’s account. It’s primarily used in options and futures markets and allows an exchange to determine risk scenarios for open positions.
Special vs Standard Margin Requirements
| Special Margin Requirement | Standard Margin Requirements |
|---|---|
| Brokers can determine special margin rates. | Initial margin is set at a 50% minimum and maintenance margin is set at a 25% minimum, per federal regulations. |
| May apply to highly volatile stocks, highly concentrated positions, or risky asset types. | May apply to more standard, liquid, fully marginable stocks and ETFs. |
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How Do Special Margin Requirements Work?
Special margin requirements are determined by brokerages, which may enforce stricter deposit requirements in accounts trading volatile stocks or otherwise riskier assets. Brokers evaluate volatility and risk to help protect themselves and investors in the event securities in an account rapidly drop in value. Another way brokers protect margin accounts is by issuing margin calls when special margin requirement percentages are breached.
A margin call means an investor must deposit more cash or securities into their account to meet the call. Investors can also liquidate their holdings to generate cash and increase their equity percentage. If an investor fails to meet the call on time, the broker might liquidate the positions for them.
For a broker, it’s important to have safeguards, such as special margin requirements, in place in case financial markets turn volatile. If many investors face margin calls simultaneously, the broker could potentially face credit risk, as those investors may be unable to repay the loans used in margin trading.
Pros and Cons of Special Margin Requirements
The potential upside of special margin requirements is that they can help control risk when investors engage in trading or day trading, which may help to protect brokers and traders alike from steeper losses. The potential downside for traders includes additional restrictions on their margin trading account.
Here’s a closer look at how they might impact the broker and the investor.
Pros and Cons for Brokers
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Pros:
• Special margin requirements may reduce the broker’s risk of seeing catastrophic losses if markets become volatile.
• They allow for tighter margin calls on risky positions.
• Historical data provides a guide as to which stocks are most volatile.
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Cons:
• Special margin requirements may lower trading volume.
• Individuals might seek looser requirements from other brokers, though this could involve higher risk.
• Trying to predict which securities will be the most volatile going forward involves uncertainty.
Pros and Cons for Investors
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Pros:
• Special margin requirements can provide guardrails, potentially reducing the risk of investors seeing substantial losses if markets become volatile.
• May help to curb more extreme speculative trading in volatile markets.
• The requirements can help investors identify highly volatile stocks for certain strategies (such as options trading).
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Cons:
• Higher special margin requirements may reduce investors’ available purchasing power.
• Margin calls can be triggered more quickly.
• Margin percentages can change without notice.
The Takeaway
While many assets have initial margin requirements of 50% and maintenance margin levels of 25%, it’s not uncommon for riskier securities to have higher special margin requirements. These requirements help protect both brokers and investors if a stock price moves sharply in an adverse direction.
Margin trading is typically riskier than trading with a cash account. Investing with borrowed funds can amplify potential returns — both positive and negative. It’s essential to be aware of the risks involved with this strategy.
If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.
FAQ
What is a special margin account?
A margin account is a type of brokerage account in which your broker lends you money, using the account’s equity or cash as collateral, to purchase securities. These securities are known as marginable securities. Margin increases your leverage, or purchasing power, but also exposes you to the potential for larger losses.
What are margin requirements?
Margin requirements are percentages of equity you must maintain in your margin trading account. According to Regulation T of the Federal Reserve Board, the initial margin minimum for opening a position is 50%, and the maintenance margin minimum required to maintain the account is 25%. Highly volatile or otherwise risky assets frequently have higher special margin requirements. A highly concentrated position might also trigger a special margin requirement.
How much money do you need to open a margin account?
The NYSE and FINRA require investors to provide a $2,000 deposit (or a combination of cash and securities) with their broker before they trade on margin. Some firms may require larger deposits.
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