Module 9 · Lesson 2 of 12 · Futures · About 5 minutes
Futures Margin and Daily Mark-to-Market Explained
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Before you read: Futures Contract Specifications: Size, Tick, Multiplier and Months
What you will learn
- What futures margin is, and why it is a performance deposit rather than a down payment.
- The difference between initial margin, maintenance margin and the lower day-trading margins some brokers offer.
- How mark-to-market moves cash in and out of an account every day, and how a margin call happens.
Is futures margin the same as stock margin?
When you post margin on a futures contract, are you borrowing money?
No. In a stock margin account, margin means borrowing from the broker to buy more shares than your cash covers, and you pay interest on the loan. Futures margin works differently. Nobody pays the full contract value when a futures position opens, because nothing has been delivered yet. Both the buyer and the seller post a good-faith deposit with their broker, who passes the required amount on to the clearinghouse. The deposit exists to cover losses the position might run up. It is collateral, not a purchase price, and no loan is involved.
What are the levels of margin?
Why would there be more than one margin number for the same contract?
- Initial margin is the deposit needed to open one contract. The clearinghouse sets a minimum, and brokers can ask for more.
- Maintenance margin is a lower threshold. While the position is open, the account must stay above it. If losses push the account below maintenance, the broker asks for more funds.
- Day-trading margin is a lower deposit some brokers allow for positions opened and closed within the same session. It is a broker policy, not an exchange level, and it usually reverts to the full requirement if the position is held past a set cutoff time. A lower deposit does not lower the risk. It only means a smaller move can use up the money in the account.
Exchanges and clearinghouses review their margin levels regularly and can raise them quickly when markets become volatile. Any margin number you see is a snapshot.
What does marking to market mean?
If a position gains or loses during the day, when does that money actually move?
At the end of each trading day, the exchange publishes a settlement price for each contract. Every open position is revalued at that price. If the price moved in your favor, the gain is credited to your account in cash. If it moved against you, the loss is debited. This happens daily, not just when the position is closed, so futures gains and losses are realized in cash as they happen.
A worked example with a fictional contract worth $20 per point:
| Day | Settlement price | Change (points) | Cash flow for one long contract |
|---|---|---|---|
| Open | Entered at 100.00 | – | – |
| 1 | 102.50 | +2.50 | +$50 |
| 2 | 98.00 | −4.50 | −$90 |
| 3 | 99.25 | +1.25 | +$25 |
After three days the position is down 0.75 point in total, or $15, and the account balance has already moved by that amount through three daily cash transfers.
How does a margin call happen?
What happens when the account dips below the maintenance level?
Suppose a fictional contract needs an initial deposit of $1,000 and maintenance of $800, and the account holds exactly $1,000. A loss of $250 drops the balance to $750, below maintenance. The broker then asks for enough money to bring the account back to the initial level, $250 in this case. If the money does not arrive in time, the broker can close the position without waiting for instructions, at whatever price is available. In fast markets brokers can act within the same session, and many state in their agreements that they may liquidate without a call at all.
Losses in futures are not capped at the deposit. If the market moves far enough, especially through a gap, the account can go negative, and the holder owes the shortfall.
Margin diagram
Illustrative diagram constructed for teaching. Not real market data.
The diagram shows a fictional account balance stepping up and down with daily settlements, crossing below the maintenance line and triggering a call to top up to the initial level. It is constructed for teaching and is not real market data.
What this does not tell you about margin
- Margin levels for real contracts change. Check the clearinghouse and your broker for current numbers.
- Meeting the margin requirement does not make a position size prudent. Margin is the minimum to hold a position, not a recommendation.
- Broker margin policies, intraday cutoffs and liquidation rules differ. Read your own broker’s agreement.
- Tax and accounting treatment of daily settlements depends on where you live and is outside the scope of this lesson.
Check yourself
- Why is futures margin described as a performance deposit rather than a down payment? Hint: has anything been bought yet?
- In the fictional example, the account starts at $1,000 and loses $300. Maintenance is $800. How much does the broker ask for, and why that amount? Hint: the call restores the initial level, not the maintenance level.
- Does a lower day-trading margin make a trade less risky? Hint: what does the price move do to the account in dollars?
Reflect on your own process
- What written rule do you follow for how far an account may fall toward maintenance before you act, and why that level?
- Where do you record the date and source of any margin figure you use, given that margin levels change?
- Have you read your broker's liquidation terms, and what did you note about when they can close positions?