Margin Call and Close-Out on a Gold Futures Position
On 3 June a client holds 10 long PMEX gold futures contracts, each for 100 grams. The previous settlement price was PKR 24,000 per gram. The broker applies an initial margin of 5% of contract notional and a maintenance margin of 3.5%. The client's account equity before the price move is exactly the initial margin. During the next session gold falls 4% to PKR 23,040 per gram and remains there at the close. The client is traveling and has not responded to two calls. The broker's risk desk must act before the next morning's clearing deadline. The client later claims the broker should have waited because gold "always rebounds" and that closing the position caused a loss of opportunity.
1. Calculate the client's equity, the maintenance margin requirement and the margin shortfall. What margin call should the broker issue?
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Position: 10 contracts x 100 grams = 1,000 grams.
Initial notional at PKR 24,000/g = PKR 24,000,000. Initial margin at 5% = PKR 1,200,000. Opening equity is therefore PKR 1,200,000.
Price falls 4% to PKR 23,040/g. Loss = 1,000 x (24,000 - 23,040) = PKR 960,000. Equity = 1,200,000 - 960,000 = PKR 240,000.
New notional = 1,000 x 23,040 = PKR 23,040,000. Maintenance at 3.5% = PKR 806,400. Equity is below maintenance by PKR 566,400.
To restore initial margin on the new notional: 5% x 23,040,000 = PKR 1,152,000. The client must deposit PKR 1,152,000 - 240,000 = PKR 912,000.
The broker should issue a margin call immediately, specifying the amount, the deadline and the consequence of non-payment. The account is in substantial deficit, so the call should be escalated, not left to routine processing.
2. What must the broker do if the client does not respond by the deadline? Can the broker wait for a rebound?
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The broker must follow the exchange and broker risk rules: issue the call by the prescribed time and close out if the client fails to meet it. The broker cannot rely on the client's travel or on a forecast that gold will rebound. Waiting exposes the broker and the clearing house to further loss and is itself a risk-management breach.
The broker should attempt contact through all recorded channels, document those attempts, and if no funds are received by the deadline, liquidate enough of the position to eliminate the deficit promptly and in the client's best-execution interest. The liquidation should be recorded with time, price, size and the reason. Any residual debit becomes a client receivable subject to the broker's credit policy and complaints process. If the broker delays liquidation beyond the deadline, it must document why and accept responsibility for any loss caused by that delay.
3. How should the broker respond to the client's claim that closing the position caused a loss of opportunity?
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The broker's obligation is to manage margin risk, not to guarantee upside. The close-out was triggered by the price move and the failure to meet the margin call. The client's claim of foregone rebound is not a defence to non-payment of a valid margin call.
The broker should retain the margin call, price records, contact log, liquidation tickets and all calculations. If the broker failed to give proper notice or delayed liquidation beyond the deadline, that is a separate conduct issue; any remedy would be assessed on the actual loss caused by the breach, not on the hypothetical rebound. The complaint should be handled under the broker's complaints procedure with a written outcome and regulatory reporting if required.