Understanding Margin Calls: What They Are & How to Respond

A house call is an order by a brokerage firm demanding an account holder to increase the margin account’s equity when it is below the requirement. The call is often preceded by losses in the securities bought on margin, which is the credit extended to traders to purchase additional securities.

Investors must maintain a minimum equity level (maintenance margin) to continue enjoying borrowing privileges in their margin account. A house call is typically orchestrated due to market swings. The maintenance marginMaintenance MarginMaintenance margin is the total amount of capital that must remain in an investment account in order to hold an investment or trading position and avoid a required is based on the current market value of stocks rather than its purchase price.

Summary

• A house call occurs when a brokerage firm demands an investor to deposit more cash into a margin account to cover margin shortfalls when it is below the standard threshold.
• House calls are affected by market movements, as the margin requirement maintenance is based on the shares’ market value and not the purchase price.
• According to Regulation T, if an investor fails to honor the house call within five business days, the holdings in the margin account are liquidated to offset borrowing risk.

Understanding House Calls

The investment regulations set the minimum amount required for the investor to open a margin account, the initial amount for investment on margin, and the least equity that qualifies the investor to continue borrowing.

There are typically three types of calls associated with margin investment. One such call is the initial margin call, also known as the Federal call, and is made when the account holder has inadequate equity to meet the initial requirement. The second call is the house call, also referred to as a maintenance call initiated when the equity falls below the minimum amount needed to offset losses.

The third call is the exchange call or NYSE call that serves to notify the investor that their equity level is below the NYSENew York Stock Exchange (NYSE)The New York Stock Exchange (NYSE) is the largest securities exchange in the world, hosting 82% of the S&P 500, as well as 70 of the biggest‘s 10% level. As a type of margin call, the house call targets investors who borrow money from the brokerage firm to buy stock. They are bound by the firm’s requirements to retain certain required levels of funds to offset borrowing costs.

Buying Shares on Margin

Investors can increase the returns of their portfolio of securities by buying additional securities on margin. They borrow using broker-dealer margin accounts, which measure account holders’ liability to the brokerage firms. Loans by brokers for the holding or purchase of shares and other loans not related to common shares are included in the liability.

Such a liability in the form of a loan is borrowed to facilitate leveraged trading of the securities. If the market price of securities increases, the investor can sell them, repay the liability and retain the excess as profits. However, if the securities decrease in price and the investor sells, he or she incurs a loss and still owes the brokerage firmBrokerageA brokerage provides intermediary services in various areas, e.g., investing, obtaining a loan, or purchasing real estate. A broker is an intermediary who the margin amount. Also, if the amount they’ve deposited in the reserves is less than the amount they owe, they must reconcile the deficit.

A house call is made if the holdings’ value falls below the required deposit amount. In order to make up the difference, investors can either sell a portion of assets or deposit more cash in the account. A customer can borrow up to 50% of the holdings’ initial buying price, subject to the requirements under the Federal Reserve Board’s Regulation T. Even so, individual broker-dealers reserve the right to adjust the rate as long as it is higher than what is provided in Regulation T.

Also, the account records the holdings and transactions of both margin securities and in accordance with Regulation T. The securities contained herein must be assigned a street name with the brokerage firms as the legal owner.

House Call Requirements for Firms

The Financial Industry Regulatory Authority (FINRA)Financial Industry Regulatory Authority (FINRA)The Financial Industry Regulatory Authority (FINRA) acts as a self-regulatory organization for securities firms operating in the United States. imposes additional requirements on margin accounts. One requirement is the minimum 25% equity level of the market value of investments that a brokerage firm must retain as collateral. The broker-dealer is allowed to adjust the minimum price to fit its requirements.

Usually, the highest minimum is 50% of the purchase price of the securities purchased on margin. The value becomes the automatic threshold for an equity deposit. The house call gives an account holder a specific period of time to meet the margin maintenance.

For example, the Fidelity Account Investment requires full payment of house maintenance within five business days of the trade date. The margin maintenance is 50%. Debit balances are not allowed beyond such a time span for the purpose of trading securities and cannot be used for short sales.

If the trader fails to deposit the full amount, the brokerage firm will proceed to liquidate securities in the account so that no other payments can be authorized without payment on the trade date. A typical example of an investment firm with the same requirements is the Charles Schwab Corporation. The investment firm’s house calls are due immediately with a margin maintenance requirement of 30%.

Additional Resources

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