Marginal Trading
Margin trading (trades “with credit”) consists of the purchase of securities by an investor for monetary assets given by the broker the sale of securities provided by the broker. When buying securities “with credit,” the client pays part of the trade’s value with his own monetary assets and the remaining sum is lent by the broker. When selling securities (sale “without cover”, or “short” sale) the client borrows securities from the broker and sells them on the market then repays the loan with securities purchased later. Thus, margin trading provides the investor with two opportunities:
- To use a greater amount of monetary assets when buying securities (borrowing money from the broker);
- To gain profit from the decrease of the share market price (borrowing money from the broker).
Brokers lend to investors under the pledge of monetary assets and/or securities that are in the investor’s account with the broker. The investor may also perform operations with the securities and monetary assets that are pledged. In addition to the monetary assets, the broker may take securities that comply with the requirements established by the regulatory legal acts for including securities on the first level of Quote List “А” of securities market trading organizers as collateral for the performance of the client’s obligations on granted loans. The right to conclude margin trades is given by the broker to his clients at his sole discretion and the broker can refuse this service to a client.
Margin trades are allowed exclusively in the stock exchange and/or through other securities market trading organizers who have the necessary license from the federal executive securities market authority. Securities market trading organizers (including stock exchanges) provide the federal executive securities market authority with information on the results of trades executed using monetary assets and/or securities borrowed by the client from the broker (margin trades) created on the basis of documents received from traders in the procedure established by trading organizers.
If clients are provided with margin trading services in order to manage emerging risks, the broker calculates the client’s collateral value and margin level should the client be in debt to the broker resulting from the conclusion of the trade. The margin level is calculated according to the following formula:
MLv = (CMA + SV − CI) / (CMA + SV), where
CMA is the sum of monetary assets in the broker’s special broker account (including monetary assets which should be entered for the client in the broker’s special broker account due to previously concluded trades no later than the end of the current working day, with deduction of monies which should be paid from the broker’s special broker account due to previously concluded trades no later than the end of the current working day);
SV is the market value of the client’s securities taken by the broker as collateral for the performance of the client’s obligations (which are found in the client’s depo account, or should be accepted to the client’s depo account with deduction of the securities’ current market value, which should be written off from the client’s depo account due to previously concluded trades no later than the end of the current working day);
CI is the client’s indebtedness to the broker on the loan resulting from the broker’s execution of margin trades (or which might result from settlements on all trades executed for the benefit of the client that cannot be settled: the sum of the negative money remainder and the negative remainder value of margin securities).
A margin trade is only possible if the margin level is at least 50%, provided that a higher margin level limit is not stipulated by the broker in the agreement with the client. The broker may not execute a trade causing the margin level to drop below the margin level limit. If the margin level is below the margin level limit, the broker cannot execute the trade that would cause the decrease of the margin level. If the margin level reaches a value of 35% or lower, the broker must send a request for the client’s contributing monies or securities in an amount sufficient to increase the level to the margin level limit (the broker may stipulate a higher margin level for the request to be sent in the agreement with the client) to the client.
Thus, the client has the possibility to buy more securities than can be afforded by his monies due to the monetary assets given by the broker. The negative remainder in the client’s account must be less than the market value of the securities given to the broker as the loan collateral.
The client may also sell more securities than he has in his account due to the securities granted to him by the broker. The negative remainder of securities in the account must be less than the market value of the securities given to the broker as the loan collateral and the monetary assets present in the client’s account.