Frequently Encountered Market-Related Rules and Regulations

 
Article 1 When the equity amount of a futures trader is less than the required maintenance margin, the trader is required to make up the margin shortfall. Does the trader also face a risk of over-loss?
Analysis
On a given day, the equity balance in a given futures trading account at an FCM falls below the required maintenance margin for the account’s open positions, and the principal receives a margin call notice. The principal believes that brokerage contract states that the FCM may execute a compulsory offset of the open positions on the person’s behalf, and therefore does not make up the margin shortfall. This unexpectedly leads to a large financial incident that results in an over-loss in the account. Can the person refuse liability for the over-loss on the grounds that the FCM executed a compulsory offset on the person’s behalf?
Relevant Rules and Regulations
1. Article 29 of the Regulations Governing Futures Commission Merchants (hereafter “the Regulations”) states that brokerage contracts will include: the principal’s obligation to maintain the margin account; conditions under which the FCM may offset futures positions on behalf of the principal and related matters; and the method and timing of margin calls.
2. Article 48, Paragraph 2, Subparagraph 3 of the Regulations states that when the balance in the customer’s segregated margin account is less than the required maintenance margin, the FCM shall immediately issue a notice to the customer to deposit additional equity in the account to return it to its original balance; Paragraph 3 in the same article states that the additional equity shall be paid within the time limit prescribed in the brokerage contract.
3. Article 49, Paragraph 1 of the Regulations states that if the equity amount of a futures trader is less than the maintenance margin required by the regulations of a given futures exchange, the FCM shall issue a margin call.
Key Points for Futures Traders
(1) When futures traders engage in futures trading, they must be aware of the relevant regulations and risks. When a trader opens an account, a qualified associated person will explain the nature of the various futures products, the trading terms and conditions, and the likely risks. The trader must also read the brokerage contract and the risk disclosure statement in order to protect his or her own rights and interests. (2) The brokerage contract states that an FCM may execute a compulsory offset on behalf of a principal. Under certain special circumstances, this offset may give rise to over-loss. Traders have an obligation to maintain their margin accounts, and must be aware of the relevant regulations when they engage in trading.