Margin (Performance Bond)
In financial and commodities markets, a margin is collateral that the holder of a position in securities, options, or futures contracts has to deposit to cover the credit risk represented by his position to his counterparty (most often his broker). This risk can arise if the holder has done any of the following:
- borrowed cash from the counterparty to buy securities or options
- sold securities or options short, or
- entered into a futures contract
The collateral can be in the form of cash or securities, and it is deposited in a margin account. On U.S. futures exchanges, “margin” was formally called a performance bond.
Keep in mind that gains in futures trading result in credits to your futures margin account. Futures margin and the margining process ensure the financial integrity of the marketplace – a vital function. All buyers and sellers of futures are required to post and maintain margin as a performance bond which virtually eliminates counterparty risk for all participants. Many people like to get a bid bond. what is a bid bond? A bid bond is issued as part of a bid by a surety bond company to the project owner. The owner is then assures that the winning bidder will undertake the contract under the terms at which they bid.
The dollar level of margin required to trade a CME agricultural contract varies based on the value and volatility of the underlying commodity. Typically the amount of margin required is only 5-10% of the contract’s notional value, creating significant financial leverage.
As an example, one can trade a corn futures contract with a notional value of $20,000 for an initial margin deposit of approximately $1,500 or a soybean contract with a notional value of $50,000 for an initial margin deposit of roughly $3,700.
