What is a margin call?
Margin Call
A margin call is triggered when the balance of your margin loan exceeds your borrowing limit by more than the allowed buffer. If the value of your loan security falls, the borrowing limit falls and so does the value of the buffer. If the new borrowing limit drops below your outstanding loan balance by more than the new buffer, you will be subject to a margin call.
Learn how to manage a margin call.
A margin call is a call to action
A margin call requires you to:
- reduce your margin loan balance to your borrowing limit, OR
- increase the value of your borrowing limit by adding additional approved securities.
If you don't have the funds
If you do not have the funds available to repay part of the loan when a margin call is made, or you are unable to provide additional acceptable securities, there is a risk that you will have to sell your securities at a less than optimal time, which may result in a loss of return.
Reduce the risk
Take a look at how risk management can reduce the chance of a margin call.
Buffer
With a margin loan, you are given a limit to the amount that you can borrow based on your investments (your borrowing limit). You are allowed a small buffer (for example 10%). If the value of the investment portfolio held as security for your loan falls, the borrowing limit falls, and so does the value of the buffer. If your outstanding loan balance exceeds the borrowing limit by more than the buffer you are subject to a margin call.
Example
Consider the below example
| Scenario 1: portfolio drops by 11% |
Scenario 2: portfolio drops by 26% |
|
|---|---|---|
| Amy's Portfolio market value | $36,000 | $36,000 |
| New Portfolio market value of Amy's portfolio following market correction | $32,040 | $26,640 |
| Loan to Value Ratio (LVR) (Maximum percentage that BT will lend you based on an individual security - assuming 60% in this example) |
60% | 60% |
| Borrowing Limit (Portfolio market value x LVR%) |
$19,224 | $15,984 |
| Loan Balance (what Amy has borrowed) | $20,000 | $20,000 |
| Total buffer allowable if the buffer is 10% of the market value of the portfolio | $3,204 | $2,664 |
| Loan Balance exceeds the Borrowing Limit by | -$776 | -$4,016 |
| Buffer/Margin Call | Remaining buffer $2,428 | Buffer has been full utilised and exceeded. The loan account is now in margin call and a payment of $4,016 is now required to restore the account back to the borrowing limit. |
Scenario 1 - in the buffer
As this account is still in the buffer, it is not necessary for the client to take any action but the client can not borrow any more than $2,428.
Scenario 2 - below the buffer
As the borrowing limit has dropped below the outstanding loan balance by more than the buffer, the loan account is now in margin call. A payment of $4,016 is required to restore the loan balance to the borrowing limit.
Disclaimer
Examples given are for illustrative purposes only and cannot be relied upon as any indication of the outcomes of investment. Neither BT Securities Limited (BTS), nor any director, officer, employee or associate of BTS or of any related entity make any express or implied representation or warranty regarding the accuracy or completeness of this information, except to the extent that liability cannot be excluded by law. Any projections given on this website are predictive in character. While every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ from these projections. An investment in securities is inherently speculative. The market price of the securities may increase or decrease. BTS does not make any representation, or give any advice or recommendation, as to the potential profitability or otherwise of purchasing securities. If you are in any doubt, you should consult your financial adviser.
How is the buffer set?
A buffer ensures that small falls in the market don't result in a margin call.
The size of the buffer varies with different margin lenders. With BT Margin Lending, the buffer is currently 10% of the total value of approved securities in your loan portfolio but is subject to change at any time.
