A margin call is a request for funds, to be held as a deposit against your forward contracts. It is triggered if the exposure of a forward contract exceeds the agreed variation margin.
The deposit enables you to maintain your forward position at the agreed rate. Ebury offers uncommon flexibility around margin calls but generally they are required to be paid within two business days.
Businesses with multiple forward contracts often employ net positions to reduce their likelihood of being margin called. The exposure across their forward positions is collated to create a cumulative risk position, so that positive P&L on some contracts can help offset exposure on others. Margin calls are calculated differently for forward contracts and net positions.
When do we issue a margin call on Forward Contracts?
For a standard forward contract the classic credit conditions are based on a percentage and Ebury takes into account the exposure per trade.
If the sell currency appreciates by more than the variation margin, a margin call would be issued.
Example
Credit terms:
Initial deposit: 0%
Variation margin: 2.5%
Margin call: 2.5%
Open forward position:
Sell GBP, Buy USD @ 1.30
So if 100,000 GBP worth of USD is booked at 1.30 and the market goes to 1.3325, given the credit terms, the margin call amount would be 2,500 GBP. If the exposure drops to zero, the margin call will be refunded.
When do we issue a margin call on net positions?
With net credit positions, we look at the overall exposure per client and calculate based on absolute values.
If the collective exposure rises above the variation margin, a margin call would be issued.
Example
Contract terms:
Initial deposit: 0%
Variation margin: GBP 200,000
Margin call: GBP 50,000
There are 5 open forward positions and we calculate the exposure for each:
Position 1: Positive GBP 12,000
Position 2: Exposure of GBP 50,000
Position 3: Exposure of GBP 72,000
Position 4: Positive GBP 10,000
Position 5: Exposure of GBP 105,000
Combined: An exposure of GBP 205,000
The aggregated exposure exceeds the GBP 200,000 variation margin, so a margin call would be issued at GBP 50,000, as set out in the initial terms of the contract.
The payment of the margin call decreases the combined exposure from GBP 205,000 to GBP 155,000, back below the variation margin. If the exposure increases above GBP 200,000 again, another margin call will be issued. If the exposure drops to zero, the margin call will be refunded.
However, if the client in this example had paid an initial deposit for their forward contracts, it would be taken into account. If the initial deposit had been GBP 100,000, for example, the starting aggregate position would be positive GBP 100,000 and the combined exposure would need to fall to negative GBP 300,000 before a margin call is issued.
In both examples, as you drawdown on your forward contract the amount of margin call held against the contract reduces.
