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Initial margin VS haircut

CFDs are traded on margin and there are two different forms of margin that may be payable when trading CFDs – Initial and Variation Margin. When you trade Contracts for Difference (CFDs), you can take a position in an asset which is more than the money you have available. This is called leveraging or gearing your money. However, you will need to have a certain amount in your account to be able to open the position, and this is called the initial margin. The initial margin is in fact a deposit used as collateral to open a CFD position. The margin is held to ensure you can meet your obligations.

The margin rate is usually expressed as a percentage and is calculated based on the liquidity and volatility of the underlying security. The initial margin is the amount required to open a position and typically varies from 3-5 per cent for the large, liquid stocks at the top end of the market or index, to up to 80 per cent for the smaller, less liquid stocks at the bottom end of a market or index. Margins are charged to cover the CFD provider if the price moves dramatically against the client’s initial position. Margin amounts are deposited back into the client’s account as and when trades are closed out.

In return for being able to trade on this minimum margin (Initial Margin), the CFD provider charges interest on the full face value of the underlying position. Interest is calculated daily on all long positions held overnight. Similarly, interest is paid on the face value of any short positions held overnight. This interest charge is normally calculated at the overnight cash rate (or a similar benchmark) plus or minus a set percentage as determined by the CFD provider. This is known as a haircut or edge. CFD providers make a profit from these haircut additions to the interest cost. CFD commissions or brokerage rates on trades are charged on a percentage of the size of the face value of the trade. These apply to both the entry side and the exit side of the trade. They are, however usually significantly less than commissions charged by traditional equity brokers.

Calculating your Initial Margin

Quantity x Price = Full Notional Value

1000 x $10 = $10, 000

Full Notional Value x Margin Percentage= Margin Required

$10, 000 x 5% = $500

Your initial margin is $500

Practicalities

The CFD broker will set different rates for the initial margin depending on the risk that is perceived. This means that different brokers may charge different percentages for the same trader, so it pays to shop around. The broker may take your financial profile and experience into account when setting the levels, and some brokers will have different ideas of the riskiness of the various financial securities that you can trade CFDs on.

You will usually find a margin of about 10% charged on stocks or even 5% on blue chips, whereas indices, which are regarded as more stable, may only need 1 or 2%. Rates also vary on other tradable assets, and the broker who has a competitive rate on stocks may not give such a good deal on commodities.

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Self-Regulatory Organizations; ICE Clear Europe Limited; Order Granting ..  — Insurance News Net
ICE Clear Europe states that the changes to the Risk Policy amend the calculation of CDS initial margin requirements to comply with margin requirements under EMIR Article 41 and Article 24 of the implementing Regulatory Technical Standards. /5/ ICE ..

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