What is House Maintenance Requirement?
263 reads · Last updated: December 5, 2024
A house maintenance requirement is the level of minimum margin account equity that is required by a brokerage firm. House maintenance requirement levels are based on the standards set out in Regulation T of the Federal Reserve.Although Regulation T specifies the minimum maintenance requirements permitted by law, brokerage firms are free to adjust their own “house” maintenance requirements, provided that their standards are more rigorous than the minimum requirements set out in Regulation T.
Definition
The maintenance margin requirement is the minimum account equity level required by brokers for margin accounts. This requirement ensures that investors maintain a certain level of equity in their accounts during margin trading to reduce the broker's risk.
Origin
The concept of maintenance margin requirements originates from the Federal Reserve's Regulation T, which sets the minimum maintenance standards for margin trading. Although Regulation T establishes the statutory minimum, brokers can set stricter requirements based on their risk management strategies.
Categories and Features
Maintenance margin requirements are typically divided into statutory minimum requirements and broker-specific requirements. The statutory minimum is set by Regulation T and is generally more lenient, while broker-specific requirements may be stricter to better manage risk. Brokers may adjust their requirements based on market volatility, client creditworthiness, and other factors.
Case Studies
For instance, during the 2008 financial crisis, many brokers increased their maintenance margin requirements to cope with extreme market volatility. A major broker raised its requirement from 25% to 35% to ensure clients' accounts had sufficient equity to withstand market downturns. Another example is during the early 2020 pandemic, when market volatility led some brokers to temporarily raise maintenance requirements to mitigate potential default risks.
Common Issues
Investors often confuse maintenance margin requirements with initial margin requirements. The initial margin is the minimum amount needed to open a position, while the maintenance margin is the minimum equity required to maintain a position. Additionally, investors may overlook that brokers have the right to adjust maintenance requirements during market volatility, which can lead to margin calls.
