In one of my recent Futures classes I was instructing, a student was having some difficulty understanding what a Performance Bond or Margin is in Futures trading. We spent a little more time on the subject than usual because I like to take my classes forward as a team and never leave anybody behind. During the next break I also had a one-on-one conversation with him about what a Performance Bond/Margin is. This is not unusual for a new Futures trader who is coming from trading a cash account in the Equities markets to trading a margin account in the Futures markets.
The next day the student arrived and explained to me how he came up with an analogy so he could understand this concept of margin. To him it was like playing poker and to get in the game a player must put up an ante. The ante is kept in the pot until all the players have placed their bets and the hand has been played. Once the hand is over the losers would leave their ante in the stack of chips and the winner would receive the stack of chips giving him/her more chips to play future hands with. Meanwhile the losers of the hand would have less chips in their stack. Just like the poker player who puts up a few chips (ante) to control the entire stack of chips placed by all players, the Futures trader only puts up a small percentage of the entire contract size (3-9% usually) to control 100% of the value of the contract.
In class we usually go to the Chicago Mercantile Exchange Group (CMEGroup) website to view the different margin requirements for all the different Futures products that trade on that Exchange. For this article I would like to discuss how the Inter-Continental Futures Exchange (ICE) posts their margins and how they may appear to be a little different than we are used to seeing on the CMEGroup website.
When looking to see how much capital is required to be in a traders account to meet the margin requirements we typically see two columns listed:
Initial Margin Maintenance Margin
Think of Initial Margin as the amount required to initiate a new Futures position. If you buy or sell a… Continue Reading
