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FRM Part I · FRM Exam Part I · Introduction to Derivatives

A clearing member's customer buys 10 futures contracts through a CCP-cleared exchange. The initial margin is USD 5,000 per contract and the maintenance margin is USD 4,000 per contract. Which statement best describes the purpose of the maintenance margin level?

The maintenance margin is the threshold below which a margin call is triggered. The investor must then top up the account to the initial margin level, not just the maintenance level. Failure to meet the call allows the broker to close the position.

  1. AIt is the amount at which the position is automatically closed by the exchange
  2. BIt is the balance below which a margin call is triggered requiring the account to be restored to the initial margin levelCorrect
  3. CIt is the amount returned to the customer at contract expiry
  4. DIt is the fee charged by the clearing house for novation

Explanation

When the margin account balance falls below the maintenance level, a margin call is issued. Under standard exchange practice the trader must deposit enough to bring the balance back to the initial margin level, not merely to the maintenance level. Automatic closure happens only if the call is not met.

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