The Margin Call the AP Promised to Absorb
A customer with $150,000 of equity opens three positions at one dealer on a single morning: long 1,000,000 EUR/USD filled at 1.1000; short 1,000,000 USD/JPY at 145.00; and long 1,000,000 USD/ZAR at 18.00. The dealer collects the regulatory minimum security deposit on each position and marks the account to market continuously. By 2:00 p.m. EUR/USD has fallen to 1.0300; the other two positions are unchanged. The AP calls the customer and says, "Don't worry, we'll carry you through tomorrow's central bank meeting - just don't add anything." The customer asks to enter an offsetting short 1,000,000 EUR/USD to "lock in" the loss and reduce his deposit requirement, and offers to wire funds on Friday.
1. Compute the security deposit required at the time the positions were opened and the account's excess equity. Explain why the ZAR position is treated differently from the other two.
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| Position | Notional (USD) | Rate | Deposit |
|---|---|---|---|
| Long 1,000,000 EUR/USD @ 1.1000 | $1,100,000 | 2% | $22,000 |
| Short 1,000,000 USD/JPY @ 145.00 | $1,000,000 | 2% | $20,000 |
| Long 1,000,000 USD/ZAR @ 18.00 | $1,000,000 | 5% | $50,000 |
| Total | $92,000 |
Equity of $150,000 against a $92,000 requirement leaves $58,000 of excess.
The EUR/USD and USD/JPY positions involve only major currencies, so the 2% (50:1) minimum applies. The South African rand is not a major currency, so the 5% (20:1) minimum applies to the USD/ZAR position even though it is quoted against the dollar. The security deposit is a regulatory floor, not a credit decision - the dealer may require more, but may never collect less.
2. At 1.0300, what is the customer's equity, is the requirement still met, and what must the firm do? Evaluate the AP's "we'll carry you" statement.
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Equity. The EUR long loses 1,000,000 x (1.1000 - 1.0300) = $70,000. Equity is $150,000 - $70,000 = $80,000. The other positions are unchanged.
Requirement. On the original notional, the requirement is still $92,000 - a $12,000 shortfall. Even if the dealer recomputes the EUR deposit on the marked-down notional (2% x $1,030,000 = $20,600), the requirement is $90,600 - still above equity. Either way the account is under-margined.
What the firm must do. Notify the customer immediately, demand additional funds, and if the deposit is not received within the firm's stated cure period, close out enough of the position to restore compliance. The dealer cannot simply carry an account below the regulatory minimum; doing so violates the security-deposit requirement and converts a customer problem into the dealer's credit exposure. Friday is not a cure - the firm either receives cleared funds now or liquidates now.
The AP's statement. "We'll carry you through" is both a failure to enforce margin and an implicit guarantee against loss. Even if the firm later liquidates, the customer will argue he relied on it. The AP must be corrected in writing and the call reviewed as a supervisory matter; the statement itself is a violation independent of the market outcome.
3. The customer wants to add an offsetting short 1,000,000 EUR/USD to "lock in" the loss and lower his deposit. How should the firm handle that request, and what actually happens to the account?
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The request cannot work as described. Retail forex dealers must handle customer orders on a first-in, first-out basis and may not hold offsetting long and short positions for the same customer in the same pair. A new short 1,000,000 EUR/USD does not create a hedged position; under FIFO it closes the existing long, realizing the $70,000 loss. The customer should be told this plainly before the order is accepted, not after.
Effect on the account. After the offset: realized loss $70,000, equity $80,000; requirement falls to $20,000 (USD/JPY) + $50,000 (USD/ZAR) = $70,000. The account is back above the minimum with $10,000 of excess. So the offset does cure the shortfall - but by crystallizing the loss, not by hedging, and not because the dealer showed forbearance.
Process. Obtain the order instruction with the FIFO/offset explanation documented, confirm the resulting realized loss and new deposit requirement in writing, and revisit suitability: the remaining book is a ZAR position requiring 5% and a USD/JPY short, on an account that has just lost 47% of its equity in a day. The AP's "don't add anything" advice should have been the opposite: reduce or fund.