how house maintenance requirements work
the purpose of maintenance requirements is to ensure that investors using margin accounts to make leveraged investments do not find themselves unable to repay their margin loans in this manner maintenance requirements are intended to reduce credit risk for the brokerage firms by extension they aim to reduce the systemic risk that might otherwise arise from widespread defaults by margin traders house maintenance requirements typically range between 30 and 50 while stocks are the security most commonly purchased in a margin account many other securities such as mutual funds treasuries corporate bonds and options may be purchased on margin subject to varying purchase and maintenance requirements according to regulation t margin traders must maintain equity levels of at least 25 of the value of their investments if they fail to maintain this level they may find themselves subject to a margin call by their broker 2in this situation the trader would be required to promptly deposit additional collateral into their account if they fail to do so their broker can liquidate their investment positions in order to pay back their margin any outstanding balance of the loan would then need to be repaid separately by the margin trader 3bull vs bear markets why maintenance requirements are necessaryduring bull markets margin traders may find their maintenance requirements to be unduly restrictive when asset prices are generally rising it can be tempting to leverage as much as possible in order to maximize return on equity roe however the danger of this quickly reveals itself once the market begins to turn during bear markets or periods of sudden financial shock such as occurred in the 2007 2008 financial crisis margin traders are often faced with significant risk the decline in portfolio values combined with the need to repay large margin loans on short notice due to margin calls can sometimes force margin traders into significant financial duress often these traders will forfeit all of the gains made in previous years and may even be forced to liquidate other personal assets in order to repay their margin loans therefore from this perspective the need for maintenance requirements becomes much more clear if the equity in a margin account falls below the maintenance margin the broker issues a margin call 2