Margin Call on a Spread That Moved the Wrong Way
A proprietary trading desk holds a short position in 200 front-month crude oil futures contracts at $78.50 per barrel, each contract for 1,000 barrels. Initial margin is $9,000 per contract and maintenance margin is $7,000 per contract. The desk has posted exactly the initial margin in cash plus $150,000 of excess collateral. Over two sessions the price rises to $82.10. The desk's risk officer wants to know the variation margin owed, whether a margin call is triggered, and what happens if the desk cannot fund it by the deadline. The clearing member's rules permit it to liquidate positions without further notice after the cure period.
1. Calculate the loss, the resulting margin balance, and determine whether a call is triggered.
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Each contract is 1,000 barrels, so the adverse move is $82.10 - $78.50 = $3.60 per barrel, or $3,600 per contract. Across 200 contracts the loss is $720,000.
The desk posted initial margin of 200 x $9,000 = $1,800,000 plus $150,000 excess, so $1,950,000 was available. After the $720,000 variation debit the equity is $1,230,000.
Maintenance requirement is 200 x $7,000 = $1,400,000. Equity of $1,230,000 is below that, so a margin call is triggered. The call is for the amount needed to restore equity to the initial margin level, $1,800,000 - $1,230,000 = $570,000, assuming the clearing member calls back to initial rather than maintenance. If it calls only to maintenance, the call is $170,000. The desk should confirm which convention the member applies, because the funding difference is substantial.
2. Explain the risk if the desk delays funding, and what the desk should do to control the outcome.
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The exposure is not static. The short position loses a further $200,000 for every $1.00 rise in the price across 200 contracts. If the desk waits through the cure period and the market moves another $2, the additional loss is $400,000, pushing equity further below maintenance and enlarging the call. The clearing member can liquidate after the cure period without notice, and it will do so at whatever price prevails, crystallizing the loss and removing any chance of the desk managing the exit.
The desk's options are: fund the call in full from available liquidity; reduce the position to lower the margin requirement, for example by buying back contracts to cut exposure; or negotiate a partial cure with the member. The worst option is to do nothing and hope for a reversal, because the member controls the liquidation decision and the desk bears the slippage.
The desk should also examine why a $720,000 move consumed its buffer. A $150,000 cushion against a 200-lot short is thin relative to a $3.60 move. Position sizing and stress testing should assume moves larger than recent volatility, not just the observed range.