While margin denotes borrowing for stocks, margin on futures can be categorized as a minimum cash requirement for a position. Similar to a performance bond or a good faith deposit, margin on futures is set by the exchanges based on market volatility and can be changed at anytime. Generally, margin rates range between 2-15 percent of the value of the contract.
There are two types of margins in futures: initial margin, the required amount of funds that must be deposited by a customer before the positions are initiated; and maintenance margin, the minimum amount of cash/buying power required in order to keep the position. While initial margin requirements must be met at the time of the trade, maintenance margin will only become a factor if the account value is decreasing. In the event that the account value falls below the maintenance margin requirement, a customer will receive a margin call for funds. In this case, the customer will need add enough cash to satisfy the initial margin requirement of the position.
In order to illustrate the difference between initial and maintenance margin, consider the following example:
A customer has $7,000 in a futures trading account. She/he wishes to purchase one contract of the E-mini S&P. In order to place this trade, she/he would need at least $6,160.00 in the account, the initial margin of one E-mini S&P futures contract. Since the account balance exceeds the amount of the initial margin, the customer would be able to purchase one futures contract.
After this purchase, the market moves against the customer causing the account value to fall to $5,000. Since the account value is less than the maintenance margin of $5,600, the customer would receive a margin call for $1,160, the difference between the initial margin and the account value.