Spread Betting Explained – Maintenance Margin

Maintenance Margin in Spread Betting

Now this is where most novice in online financial spread betting get very confused and make the classic mistake that they believe that having placed the trade then the initial margin is sufficient to cover the position – I’m afraid this is not the case. 

The initial margin can be viewed like a deposit, if you like, just to get you started. As soon as you open the spread bet then your trade is constantly “marked to the market” and may be in a profit or loss position, which changes second by second and minute by minute. 

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As a result a second type of margin calculation occurs called maintenance (or variation margin) which in essence calculates your ongoing exposure to the market and any additional margin (cash ) that may be required as a result. I hope the following example, which I have tried to keep as simple as possible, will explain the fundamental principles at work – here goes!

Let’s take a simple example – assume we have just opened our spread betting account with a £10,000 cash deposit, then our account would look like this:

  • Total cash £ 10,000
  • Initial margin £0
  • Variation margin £0
  • Available trading capital £10,000

You now decide to open a trade on the the FTSE 100 and buy at £10 per point. You check the product specification data sheet and find that the initial margin (IMR) is 30, so our initial margin in cash is £300 – our account now looks like this :

  • Total cash £ 10,000
  • Initial margin -£ 300
  • Variation margin £0
  • Available trading capital £ 9,700

However as soon as we have opened our spread position the FTSE 100 falls 50 points. Our account now looks like this:

  • Total cash £ 10,000
  • Initial margin -£300
  • Variation margin -£ 500
  • Available trading capital £ 9,200

Now, if we were to close our spread trade now, what happens to our account and the cash positions – it would look like this:

  • Total cash £ 9,500
  • Initial margin 0
  • Variation margin 0
  • Available trading capital £ 9,500

The above is a very simple example which I hope explains the basic principle. It is important to realize that if your spread bet moves into profit, then your variation margin will also be positive and credited rather than debited as in the above example. So in this case had the market risen 50 points, then the variation margin would be +£500. ( In practice it is a little more complicated as I have ignored the fact that your trade will have a spread which I will explain shortly.) 

I hope the above has given you a grounding in how your account will fluctuate minute by minute as trades move in and out of profit and loss, and the margin calculations are calculated simultaneously. It is your responsibility to ensure that you have sufficient cash in your spread betting account to cater for these swings, but what happens if things get out of control?