The margin requirement is the minimum amount in collateral that the issuer of a security requests from the buyer, to hedge his position against the risk of adverse price movements (market risk) or a possible buyer’s default (couterparty risk). More precisely, in forex markets margin is the amount of money that a trader must deposit in order to open a trade position. Both big investors and retail clients who wish to enter a spot contract must deposit a minimum margin requirement. The higher the number of trade positions opened, the higher the margin requirement.
The margin requirement acts as a protection against trading default and provides other parties to a transaction with confidence that the counterparty will fulfill its contractual obligations.
The margin requirement in forex markets, calculated as a percentage of the total amount to bre transacted, is usually required in cash by brokers, and must be deposited in a broker account.
A change in the margin requirement, a situation which occurs very often in currency transactions – as exchange rates vary from moment to moment – activates a ‘margin call’, which asks the client to deposit the shortfall, in order to meet the new margin requirement.