Margin Facility 

Background 

In the context of forex (foreign exchange) trading, "margins" refer to the collateral or funds that a business is required to deposit with their forex provider in order to open and maintain positions in the forex market.

This will typically be a sum equating to between 10% and 15% of the trade value.

As an example, ABD Pty Ltd wish to take out a forward contract (FEC) for a USD 200,000 transaction, which for this example equates to ZAR 4,000,000.

The margin requirement is 10% of the trade value in rand terms, meaning that ABC Pty Ltd must pay an initial margin of ZAR 400,000.

Why margin payments need to made 

Margin payments are a type of risk management. By taking a margin payment the forex provider gains a form of collateral or security deposit held. It helps ensure that businesses have a financial stake in their trades and can cover potential losses. By requiring an initial margin, brokers mitigate the risk of businesses defaulting on their obligations.

What type of margin payments must be made?

There are different situations when a margin payment must be made, but the below are typical margin payment scenarios:

Initial Margin

When a business opens a forex trade, they are required to deposit a certain amount of money with their forex provider, known as the initial margin. This margin amount is typically a small percentage (10% - 15%) of the total position size and serves as a security deposit to cover potential losses.

Maintenance Margin

In addition to the initial margin, brokers often require traders to maintain a certain level of equity in their trading accounts to cover potential losses. This is known as the maintenance margin. If your account balance falls below the maintenance margin due to exchange rate fluctuations, your forex provider may issue a margin call, requiring you to deposit additional funds to cover the shortfall. Failing to meet a margin call can lead to the broker closing your positions to limit further losses.

Margin Calls and Stop-Out Levels

Different forex providers have different policies regarding margin calls and stop-out levels. A margin call occurs when your account equity falls below a certain percentage of the required margin (maintenance margin). If you don't add more funds to your account, the forex provider may automatically close your positions when the equity reaches the stop-out level to limit their potential losses.

Margin payments versus working capital 

Working capital (cash-flow) is the lifeblood of most businesses and requires careful management. It may be the case that a business adopts a systematic hedging policy (requiring it to take out a forward position on all invoices) but this must then be balanced with working capital requirements.

As an example, ABD Pty Ltd knows that over the next 9 months they will need to pay various invoices that will total USD 1 million. For the purpose of the example, let’s assume an exchange rate of USD / ZAR 20, therefore ZAR 20 million worth of invoices.

As per their currency risk policy, they therefore decide to take out forward cover on the USD 1 million to lock in the cost at ZAR 20 million.

The initial margin payment due is ZAR 20 million x 10% = ZAR 2 million rand.

From the above example you can see that it is not an insignificant amount to pay for the initial margin, and in some instances the company simply cannot afford to part with such a sum for taking out their preferred forward cover.

Of course the dilemma is that if they do not take out forward cover, they expose themselves to currency fluctuations and in the worst case, a financial loss.

How Merchant West Incompass can help

As part of the wider Merchant West Group (South Africa’s largest private finance of SMEs), we are able to offer our own bespoke margin facility. The margin facility is available, subject to credit processes, to businesses that are clients of Merchant West Incompass and would negate the need to pay some or all of the margin payment.

Another huge benefit, along with market leading rates and expert advice, in trusting us to handle all your treasury requirements. Get in touch via our contact page, online chat or call + 27 (0) 21 424 2936.