Question

What are the purposes of the initial margin (set by the Fed) and the maintenance margin (set by the broker)?

Please give 3-4 sentances

Answer 1

The purpose of initial margin is to protect both parties in a contract from any kind of Counterparty risk. When two parties enter into a contract, there is a probability that at the time of settlement, one of the party may not fulfill its obligation. In such cases, the amount can be recoverd from the initail margin deposited and contract can be settled. Hence initial margin acts as the protection for any trading to happen.

While maintainence margin is the daily margin required to be adjusted based on the profit or losses made till the expiry of the contract. The main objective behind this is to acheive Mark to Market everyday and to square off the net gains or losses to parties on daily basis. Also the investors are using broker's money when the money is invested on margin. Hence to protect themselves, brokers ask for maintainence margin.