Guide to Special Margin Requirements

By Mike Zaccardi, CMT, CFA · May 18, 2024 · 5 minute read

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Guide to Special Margin Requirements

Special margin requirements refer to higher-than-normal requirements for margin traders. That typically means requirements that are above 25%.

According to the Securities and Exchange Commission (SEC), many brokers keep even higher maintenance margin requirements, typically between 30% and 40% — and sometimes higher depending on the type of securities purchased. These special margin requirements may vary.

Key Points

•   Special margin requirements are set above the standard 25% maintenance margin rate, indicating a need for higher equity in the account.

•   These requirements are often applied to volatile stocks or concentrated positions, enhancing broker security.

•   Margin trading uses securities in your account as collateral to amplify potential returns, though it also involves paying interest on borrowed funds.

•   The 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 a maintenance margin rate of 25%. Higher margin rate requirements mean you must maintain a higher equity amount in your account when trading on margin.

Margin trading refers to using cash and securities in your account as collateral to purchase more assets. In doing so, you can use leverage to amplify returns — but you must also pay interest on borrowed funds. For anyone interested in trading on margin, it’s important to know the rules of margin accounts and also which stocks feature special margin requirements.

When it comes to trading stocks on margin, there are plenty of blanket rules and regulations in place. For instance, the Federal Reserve requires a 50% initial margin and a 25% maintenance margin.

The Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE) also require at least $2,000 of cash or securities to be deposited before someone can trade in a margin account.

Special margin requirements are often found on highly volatile stocks, so just a small drop in the price of these stocks can trigger a margin call. Brokers might also issue special margin requirements on concentrated positions in your account. Leveraged positions and other factors might also trigger special margin requirements.

Leverage and margin are related — but not the same.

Brokers do not just haphazardly issue special margin requirements. An analysis of historical volatility is used along with the use of SPAN margin. SPAN margin is calculated by standardized portfolio analysis of risk — a system used by exchanges around the world to control risk. SPAN margin determines margin requirements based on an assessment of one-day risk for a trader’s account. It is used primarily in options and futures markets. The SPAN system allows an exchange to know what a “worst-case” one-day move could be for any open futures position.

Special vs Standard Margin Requirements

Special Margin Requirement

Standard Margin Requirements

Brokers can determine special margin rates Initial margin set at 50%
A special margin requirement might exist for a concentrated position Some securities cannot be purchased on margin



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How Do Special Margin Requirements Work?

Special margin requirements work by enforcing stricter equity deposits in your account when trading volatile stocks. The broker wants to protect itself in the event the securities in your account rapidly drop in value. Another way a broker protects itself is by issuing margin calls when special margin requirement percentages are breached.

With a margin call, you must deposit more cash or securities into your account to meet the call. You can also liquidate your holdings to generate cash and increase your equity percentage. If you fail to meet the call on time, the broker might liquidate your positions for you.

For a broker, it’s important to have safeguards like special margin requirements in place in case financial markets turn volatile. If many investors face margin calls all at once, the broker could face credit risk if those investors are unable to repay loans used in margin trading.

Pros and Cons of Special Margin Requirements

In terms of benefits and drawbacks, the upside is that special margin requirements help to control risk when investors engage in day trading — and the downside is more restrictions on your margin trading account.

Here’s a deeper dive into positives and negatives for the broker and for the investor.

Pros and Cons for Brokers

Pros Cons
Reduces risk when markets turn volatile More restrictive trading could turn away customers
Allows for tighter margin calls on risky positions Individuals might seek looser requirements from other brokers
Historical data provides a guide as to which stocks are most volatile Uncertainty exists when trying to predict what the most volatile securities will be going forward

Pros and Cons for Investors

Pros Cons
Highly volatile stocks are easier to identify Higher equity is required to trade certain stocks
Provides a guardrail when trading stocks Margin calls can trigger more quickly
Can be a tool to identify highly volatile stocks for options trading Margin percentages can change without notice

The Takeaway

While many stocks and ETFs have initial margin amounts of 50% and maintenance margin levels at 25%, some volatile stocks have higher special margin requirements. These requirements help protect both brokers and investors in the event that the stock tanks.

Margin trading is typically riskier than trading with a cash account. Investing with borrowed funds amplifies returns — positive and negative. It is important 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.

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FAQ

What is a special margin account?

A margin account is a type of brokerage account in which your broker lends you cash, using the account’s equity as collateral, to purchase securities. These securities are known as marginable securities. Margin increases your 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 for equities is 50% and maintenance margin is 25%. There are higher special margin requirements for highly volatile stocks. In addition, if you have a concentrated position, you might face a special higher margin requirement.

How much money do you need to open a margin account?

The NYSE and FINRA require a deposit of $2,000 or cash or securities with your broker before trading on margin. Some firms may require larger deposits.


Photo credit: iStock/akinbostanci

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