Legal Definitions - maintenance call

A maintenance call, often referred to as a margin call, is a demand from a brokerage firm to an investor to deposit additional funds or securities into their brokerage account. This demand occurs when the value of the investor's assets held on margin (assets purchased with borrowed money) falls below a certain minimum percentage, known as the "maintenance margin." The purpose of a maintenance call is to ensure that the investor's account maintains sufficient equity to cover potential losses and protect the brokerage firm from financial risk. If the investor fails to meet the maintenance call, the brokerage firm may liquidate some or all of the investor's holdings without their consent to bring the account back to the required level.

• Example 1 (Stock Market Volatility): Sarah purchased shares of a technology company on margin, meaning she borrowed a portion of the purchase price from her broker. Initially, her account met all the broker's requirements. However, a sudden market downturn caused the technology company's stock price to plummet by 25% in a single day. As a result, the total value of her holdings in the account, relative to the amount she borrowed, fell below the broker's minimum maintenance margin threshold. Her broker then issued a maintenance call, requiring her to deposit more cash or sell some of her other assets to bring her account equity back to the acceptable level and avoid forced liquidation.

  This illustrates a maintenance call because the significant drop in the stock's value reduced the equity in Sarah's margin account below the broker's required minimum, triggering a demand for additional funds to restore the balance.

• Example 2 (Futures Trading): A commodities trader, David, holds a futures contract for natural gas, having deposited an initial margin to open the position. Unexpectedly warm weather forecasts caused the price of natural gas to drop sharply, moving significantly against his long position. This adverse price movement reduced the equity in his margin account below the "maintenance margin" required by his futures broker. The broker promptly issued a maintenance call, demanding that David deposit additional funds to cover the potential losses and restore his account to the minimum required margin level, or risk having his position closed by the broker.

  This demonstrates a maintenance call as the unfavorable price movement in the futures contract eroded David's account equity below the broker's maintenance threshold, necessitating a call for more funds to maintain the open position.

• Example 3 (Foreign Exchange - Forex): Emily is trading currency pairs in the forex market, utilizing leverage provided by her broker. She has an open position betting that the Japanese Yen will strengthen against the US Dollar. However, an unexpected announcement from the Bank of Japan caused the Yen to weaken considerably against the Dollar. This significant adverse movement in the currency pair reduced the available equity in her trading account below the broker's specified maintenance margin. Her broker then sent her a maintenance call, instructing her to add more funds to her account to prevent the automatic liquidation of her position, which would occur if she couldn't meet the call.

  This example shows a maintenance call because the currency's movement against Emily's position decreased her account's equity below the required maintenance level, prompting the broker to demand additional capital to keep the leveraged trade open.