Three Lots of Corn, Three Settlements, One Margin Call
A customer is long 3 March corn futures at $4.80 per bushel (5,000 bu per contract; the minimum tick is $0.0025, worth $12.50). The firm requires $1,500 initial and $1,100 maintenance margin per contract, and the account holds exactly $4,500 of margin equity after the purchase. Settlements are $4.72 Monday, $4.63 Tuesday and $4.66 Wednesday. On Tuesday evening he tells the AP he will 'send a check when he gets around to it,' and argues he owes nothing because he has not sold the position and the loss is only on paper. He also wants to know who is actually holding his $4,500.
1. Walk through the three settlements. What is the account's equity each day, is a call issued, and if so for how much?
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Contract size 5,000 bu, so each cent of price is $50 per contract and each tick is $12.50. Maintenance is 3 x $1,100 = $3,300; initial is 3 x $1,500 = $4,500.
| Day | Settle | Move | Per contract | 3 contracts | Equity | Call? |
|---|---|---|---|---|---|---|
| Mon | $4.72 | -8c | -$400 | -$1,200 | $3,300 | No - equity equals, but is not below, maintenance |
| Tue | $4.63 | -9c | -$450 | -$1,350 | $1,950 | Yes - deposit $2,550 |
| Wed | $4.66 | +3c | +$150 | +$450 | $4,950 | No - $450 is excess over initial and may be withdrawn |
Key points the arithmetic depends on:
- Variation is settled against the prior day's settlement, not the entry price: Tuesday's loss is measured from $4.72.
- A call is triggered when equity falls below maintenance. On Monday equity is exactly $3,300, so no call is generated (the firm may still ask for money under its own house policy, but that is not the exchange minimum call).
- The call restores the account to initial margin, not to maintenance: $4,500 - $1,950 = $2,550. Requesting only $1,350 would be an error.
2. Tuesday's call is not paid by the deadline. What may the firm do, who absorbs the loss, and does the customer's 'paper loss' argument change anything?
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Firm's options and exposure. The customer agreement permits the firm to liquidate the position without further notice once margin is not met; the firm may also refuse new orders and close the account. The firm cannot simply ignore the shortfall: its clearing member will debit its account at the clearinghouse for the day's settlement no matter what the customer does. The customer's failure is the FCM's credit risk, not the exchange's.
Who bears the loss. The customer does. Liquidating does not erase the deficit already incurred; if the account is short of the amount owed after liquidation, the customer remains liable for the balance and the firm pursues collection.
Segregation. The firm may not solve the problem by taking cash from another customer's account; customer funds are segregated and one customer cannot fund another's deficit.
The 'paper loss' argument is wrong. Futures are marked to market daily. Every settlement is a cash debit or credit whether or not the position is closed, and the $4.80 entry price is irrelevant to the margin calculation. The economic logic is that margin is a performance bond: if the market has moved against the position, the firm must be made whole today so it is not exposed to the customer defaulting tomorrow. A hedger faces exactly the same cash flow - a good hedge liquidated for lack of funds can be worse than no hedge at all.
3. Suppose instead this customer were a commercial hedger whose firm posts hedge margin of $1,050 per contract. Does anything in the daily cash flow change, and what is the practical lesson?
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What changes. Only the size of the performance bond. With $1,050 initial and (say) $800 maintenance, the call threshold is lower and the call amounts are smaller, so the account survives a bigger adverse move before being called.
What does not change. Variation is still settled in cash every day. Hedge margin is a discount on the bond, not an exemption from mark-to-market. If prices fall 20c, the hedger's futures account is debited $1,000 per contract regardless of the margin rate, and must fund it from operating cash or a credit line.
Practical lesson. Margin rate and cash flow risk are different questions. An undercapitalized hedge can be forcibly liquidated at the bottom of a move - exactly when the cash market loss is largest - converting a hedged position into a realized disaster. That is why lenders size hedge lines on the variation exposure implied by a plausible adverse move, not on the initial margin requirement.