Margin calls
What is a margin call?
A margin call, commonly known as a maintenance call, means your loan has grown larger than your portfolio can support, and you need to bring it back in line either by depositing cash or by selling securities.
More precisely, every security you hold has a loan to value (LTV), which is the percentage of its value you can borrow against. When you add those up across your portfolio, you get your blended LTV which also tells you the maximum loan your portfolio supports. A margin call occurs when your loan balance goes over that maximum.
The flip side of LTV is the maintenance requirement (100% − LTV): the portion of your portfolio value that has to stay unborrowed. You'll see a margin call described either way, as a loan that's too big, or as equity that's fallen below your maintenance requirement. They're two ways of measuring the same gap.
Why margin calls happen
Margin calls are usually triggered by one of the following:
- Your holdings dropped in value. This is the most common cause, and your loan balance stays fixed while your portfolio's value drops.
- A trade or concentration limit changed your blended LTV. Selling a high-LTV position, buying a lower-LTV one, or letting a single holding grow large enough to trigger portfolio concentration limits can all reduce how much your portfolio supports, even if its total value hasn't moved.
- The LTV changed on a security you hold. LTVs are set by our clearing firm and can change at any time without advance notice. This is most often driven by volatility in the security itself: as a stock becomes riskier collateral, less of its value can be borrowed against. Because a lower LTV shrinks the loan your portfolio supports, this can trigger a maintenance call even if you haven't traded and your portfolio hasn't lost value.
How much do I need to cover?
Your call amount is the gap between what you owe and what your portfolio supports:
Call amount = your loan balance − (your portfolio value × your blended LTV)
You can also get there from the maintenance side, and you'll land on the same figure:
Call amount = (your portfolio value × your maintenance requirement %) − your equity
If a maintenance call is issued, the exact call amount will be shown in your Frec account. You don't need to calculate it yourself, but the formula explains how the call amount is calculated.
How do I meet a margin call?
Option 1: Deposit cash
Deposit cash equal to the call amount and use it to pay down your line of credit. It's dollar-for-dollar: a $7,000 call takes a $7,000 deposit. Cash is the fastest way to resolve a call, and the only option that doesn't affect your positions.
Option 2: Sell securities
Selling takes more than the call amount, because a sale shrinks your portfolio at the same time the proceeds need to be used to pay down your line of credit. Part of every dollar you sell is undoing your own borrowing capacity. How much more depends on your blended LTV:
Amount to sell = call amount ÷ (1 − your blended LTV)
The higher your blended LTV, the more you have to sell to close the same gap:
|
Your blended LTV |
Sell this multiple of your call amount |
A $5,000 call means selling |
|---|---|---|
|
50% |
2× |
$10,000 |
|
60% |
2.5× |
$12,500 |
|
65% |
~2.9× |
$14,300 |
|
75% |
4× |
$20,000 |
Example
You hold $100,000 in securities at a 60% blended LTV, and you've borrowed $55,000.
The market drops 20%. Your portfolio is now worth $80,000, so it supports a loan of $80,000 × 60% = $48,000. Your loan is still $55,000.
Your call amount is $7,000 ($55,000 − $48,000). Checking it the other way: your maintenance requirement is $80,000 × 40% = $32,000, and your equity is $80,000 − $55,000 = $25,000, a $7,000 shortfall. Same number.
To resolve it, either deposit $7,000 in cash or sell $7,000 ÷ 40% = $17,500 in securities.
If you sell, you're left with a $62,500 portfolio and a $37,500 loan, exactly the 60% the portfolio supports.
When is a margin call due?
Margin calls are due by the end of the business day on which they're issued. A call issued Wednesday morning must be met by the close of business Wednesday.
Our clearing firm can require a call to be met sooner than the end of the day and without prior notice. This generally happens when a loan carries elevated risk, during periods of market volatility, when a portfolio is heavily concentrated, or in unforeseen market events.
Why your call amount can change
Margin calls are cumulative: the amount tracks your account. If your portfolio keeps falling after a call is issued, the call grows. If it recovers, the call shrinks and may resolve on its own. Always work from the current amount shown in your account rather than the initial call amount, which is based on the previous day's close prices.
What happens if you don't meet it
If a margin call isn't satisfied by its deadline, positions in your account will be sold to resolve it. You don't choose which positions are sold, and sales may create taxable gains.
Avoiding a margin call
- Keep a buffer. Borrowing at the very top of your capacity leaves no room for a market dip. The smaller the gap between your loan and your maximum, the smaller the drop it takes to trigger a call.
- Use the margin call risk forecaster. Move the slider to see what a given decline would do to your account and what it would take to cover the resulting call.
- Stay diversified. Letting one position grow past 25% of your portfolio lowers its LTV and shrinks your borrowing capacity. See our article on portfolio concentration.
- Watch your loan balance as well as your portfolio. Interest accrues to the loan if not regularly repaid, so the balance can grow even when you don't borrow more.
Reg T calls vs. margin calls
A Reg T call is different from a margin call. It's triggered by a purchase made with insufficient cash, so it's about how a trade was funded, not about a decline in your portfolio. The two are resolved differently and have different deadlines.