How Does “Maintenance Margin” Prevent a Trader’s Position from Leading to a Deficit for the Clearing House?
Maintenance margin is the minimum level of collateral a trader must maintain in their margin account. If the account balance drops below this level due to adverse price movement, the trader receives a "margin call" and must deposit additional funds (variation margin) to bring the balance back up to the initial margin level.
This process ensures that the clearing house has sufficient collateral to cover potential losses before the trader's account goes into deficit.
Glossar
Clearing House
Settlement ⎊ A clearing house, within cryptocurrency and derivatives markets, functions as an intermediary between buyers and sellers, mitigating counterparty risk through a process of novation ⎊ replacing original trade agreements with new ones directly with the clearing house.
Deficit
Margin ⎊ A margin deficit occurs when the equity in a trader's account falls below the maintenance margin requirement for open leveraged positions.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.