Margin Call Before the Remittance
Malaysia Derivatives Broker Sdn Bhd is a licensed futures broker. Its client, Greenfield Plantation Bhd, holds 45 long contracts of crude palm oil futures (FCPO), each for 25 tonnes, at an average price of RM3,800 per tonne. The initial margin is RM12,000 per contract and the maintenance margin is RM9,000 per contract. On Monday morning the account equity is RM430,000. By 11:00 a.m. the FCPO price falls to RM3,650 per tonne and equity drops to RM360,000. The broker issues a margin call for RM180,000 to be met by 2:00 p.m. The client says its overseas remittance will only arrive next week and asks the broker to hold the position. It also asks the broker to transfer RM80,000 from its cash securities account held at an affiliated stockbroking company. The account executive supports the transfer because both accounts belong to the same client and the group's systems can process it. The broker's risk manager must decide what to do before the deadline.
1. Was the margin call valid, and what are the broker's obligations if the client does not meet it?
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The maintenance margin is 45 contracts multiplied by RM9,000, or RM405,000. Equity of RM360,000 is below that level, so the account is in maintenance breach and a margin call is valid. The call should restore the account to the initial margin requirement of RM540,000, which means a call of RM180,000 on the stated equity. The broker cannot simply allow the position to run without cover, and it cannot agree to 'hold' the position on an unsecured promise of future funds. If the client does not meet the call by the deadline, the broker should close out enough contracts to bring the account within the required margin and protect the broker and the market. The action should be documented, communicated to the client and reported internally. The broker must follow Bursa Malaysia Derivatives rules and its own client money and risk procedures throughout.
2. Can the broker transfer funds from the client's securities account to meet the derivatives margin call?
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The broker should not treat the two accounts as a single pool. Client assets must be segregated and applied for the purpose for which they are held. The securities account is a cash securities account, not a derivatives margin account, and it may contain funds needed for unsettled securities trades. A transfer requires the client's clear written instruction and the approval of the stockbroking firm that holds the account. Group systems do not create a legal right of set-off. The broker may accept the transfer only if the funds are free, the instruction is properly authorised and the transfer complies with the client money rules. The broker should not use the transfer as a substitute for its own credit decision or as a way to avoid closing out a position that is already in breach.
3. What should the broker do about the client's request to 'hold the position' and what records and reporting are required?
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The broker should treat the request to hold the position as a credit request, not as a waiver of the margin obligation. The risk manager should escalate it to the credit committee and record the decision and reasons. The client should be told in writing that the margin call remains due and that failure to pay may result in close-out. If the deadline passes, the broker should close out sufficient contracts promptly and document the prices, times and method. It should send the client a contract note or statement showing the close-out and the resulting balance. If the client's failure creates a default or a material risk, the broker should notify Bursa Malaysia and the SC under the applicable rules. The account executive's view that the client is 'good for the money' is not a substitute for margin cover or documented credit approval.