# Why are margin maintenance requirements based on total account value and not just the margin debt?

Just reading through Charles Schwab's margin brochure and saw this section...

The securities used as collateral must maintain a minimum value relative to the account’s margin debit balance. Schwab’s basic maintenance requirement for equity securities (“stock”) is 30% of the current market value of the security; however, this varies depending on the type of security.

So we see that the min. req. is based on the total value of the securities in the account that were purchased in any part on margin (I'm assuming this is the case meant to be illustrated here and not that that it's based on the total market value of the account (though my question would still make sense in both cases)), eg. 30% of \$12k is \$3.6k.

My question is: what is the logic of having the min. reqs. be based on the total equity value of the securities that have some margin money used in them and not just the value of the actual margin debt?

Because from this it seems like if you bought \$100k worth of stock and \$1k of that was bought on margin, then the min. req. is going to be \$100k x 0.3 = \$30k, which seems odd relative to the amount borrowed. Am I misinterpreting something here? Do let me know. Never used margin and don't know which way would be better or worse, just curious.

Because from this it seems like if you bought \$100k worth of stock and \$1k of that was bought on margin, then the min. req. is going to be \$100k x 0.3 = \$30k, which seems odd relative to the amount borrowed. Am I misinterpreting something here?

Yes, you are misinterpreting this. If you buy \$100k of stock with \$99k, you are at a 99% margin coverage.

My question is: what is the logic of having the min. reqs. be based on the total equity value of the securities that have some margin money used in them and not just the value of the actual margin debt?

Schwab is simply telling you the minimum margin maintenance amount without displaying the details of the margin calculations. To calculate it:

1) Determine the amount borrowed:

• Subtract the margin requirement from 1 and multiply by the purchase price.

• If \$10k on 50% margin then amount borrowed is \$5k

2) Determine the maximum percent of borrowed money allowed:

• Subtract the maintenance margin requirement from 1.
• Using FINRA's 25%, it would be (1 minus 0.25) or .75

3) Determine the maintenance level:

• Divide (1) by (2).
• \$5,000 / .75 equals \$6.666.67

\$6,666.67 Market Value

\$1,666.67 Equity

Equity / Market Value = 25%

The short way to determine the 25% MMMR level is 4/3 times the loan balance.

• \$5,000 x 4 / 3 = \$6,666.67 (10/7 for 30% MMR)

To visualize this:

``````  MV    Loan  Equity    Marg %    Schwab
.30*MV

10,000  5,000  5,000     0.500     3,000

7,143  5,000  2,143     0.300     2,143

6,667  5,000  1,667     0.250     2,000

6,000  5,000  1,000     0.167     1,800
``````

\$7,143 would be the MMMR at 30% \$6,667 would be the MMMR at 25%

What Schwab is doing arrives at the same answer but from another direction. Further down in the example cited in their margin handbook, they demonstrated the position at a market value of \$6,000 (the last line above). The equity is \$1000 and the minimum is \$1,800 (.30*MV) so an additional \$800 is required to support the position. That then becomes the following which restores the position to 30% MMMR:

``````  MV    Loan  Equity    Marg %

6,000  4,200  1,800     0.300
``````
• "If you buy \$100k of stock with \$99k, you are at a 99% margin" Could you explain what being "at x% margin means"? Would think if borrowed \$1k of the 100k purchase on margin, I'd be "at 1% margin". And could you also explain "\$7,143 [the MV in line 2] would be the MMMR at 30%"? I read this as saying 'the MV would be the MMMR at 30%', which I can't make sense of. Commented Aug 8, 2019 at 5:13
• Lastly, I obviously need to go and read more about this in general, but I think in general what your answer is trying to say is that 'Schwab sets their margin rules a certain way that is not the same as how it is conventionally set, but the results are the same' is this right? Commented Aug 8, 2019 at 5:13
• Yes, the description is confusing and I expected someone to question the wording. When you buy on full Reg T overnight margin (2:1), you're at 50% margin. As the position moves against you, equity is lost and the amount of margin coverage decreases (less cash/more debt in terms of the ratio). Conversely, the more cash or equity in relation to the loan, the higher the margin number gets (but technically, you're on less margin). So effectively, it's a backwards description. Or perhaps I should have said something like: 99% of the margin is covered. Commented Aug 8, 2019 at 11:55
• Line 2: The MV drops from \$10k to \$7,143 with a loan of \$5k. The equity is \$2,143 so the margin level is Equity/MV or \$2,143 divided by \$7,143 or 30%. Any further drop would result in a margin call if the broker's MMMR is 30%. If the broker's MMMR is 25%, the position could drop to \$6,667 before a margin call occurred. Commented Aug 8, 2019 at 12:11

In your example( of Charles Schwab's margin brochure ) when the stock was purchased margin debt was \$5000 and Client Equity was \$5000 and required Min Equity was \$2k, so at that time client can further borrow \$5k-\$2k= \$3k.

When price of the stock rise( if it does ?) , per example, then \$7000-\$3600 = \$3400 can be borrowed. That is additional \$400 can be borrowed.

Be careful when borrowing money ...

Because from this it seems like if you bought \$100k worth of stock and \$1k of that was bought on margin, then the min. req. is going to be \$100k x 0.3 = \$30k, which seems odd relative to the amount borrowed.[...]

You want to buy \$100K worth of stock but only have \$99K. I lend you \$1000. I'm not worried about my loan to you, not unless the stock spirals into bankruptcy. In fact, I'm happy to lend you up to \$30K cash total against that position.

If this was a one time deal, the \$30K is not a concern. i.e. you see that you can borrow more, but don't need/want to. If, long term, you are comfortable with leverage, you can look at that number to see that you can borrow to buy more stock. What you are really looking for is \$1000/.7 = \$1428.57. This number \$1.4K is the value the stock can drop to before the broker asks you to deposit more money. The \$30K is a sign to you that you have little risk of a margin call.

(Note, my math was incorrect, editing that now) Look at it this way - to understand the maintenance requirement, if you owe \$1000, and must have 30% equity, in effect, it's not unlike a mortgage where the bank offers a 70% LTV (loan to value). Therefore \$1000 "is" 70%, and by dividing, you get the 100%, the value the stock can drop to before you get a margin call.

• So are you saying that I need to maintain 30% of the margin debt in equity (here, \$3.3k) and not (as I had read it earlier) 30% of the total market value of the security that the margin loan helped finance? Else I take it you are saying: the MV can drop by \$3.3k, but yes I do need to keep 30% of the full MV of the partially-margin-loan-financed security. In which case, could you explain a bit more where are you getting the \$1k/0.3 value from? Commented Aug 8, 2019 at 4:56
• "I'm happy to lend you up to \$30K cash total against that position." If you have \$99k, at 50% initial margin, the broker is willing to lend up to 1/2 that or \$49.5k not \$30k. Commented Aug 9, 2019 at 10:58
• @LSD (1) if MMMR is 25%, you'll get margin call below 4/3 the debit balance. So a \$10k buy 50% margin (\$5k loan) has a floor of \$6,667. (2) If the maintenance level is 30%, you'll get a margin call at 10/7 the debit balance. So a \$10k purchase on 50% margin (\$5k loan) has a floor of \$7,143. At that point the MMMR is \$2,143. (3) Schwab approaches this by saying that with a maintenance level of 30%, multiply the MV by 30% to determine the MMMR. With a MV of \$7,143 the MMMR is \$2,143 which is the same as the equity. Below this point, equity will be less than MMMR and you'll get a margin call. Commented Aug 9, 2019 at 11:11
• I’ve messed up enough, I’m not sure if it’s worth saving this answer. I haven’t used margin since the crash of ‘00. Commented Aug 9, 2019 at 17:03