Margin Trading: The Two Thresholds That Decide Who Closes Your Position

Margin trading means entering a trade with money or securities your account does not hold: the missing part is supplied by the broker, secured against the rest of your portfolio. From that point on, everything is settled by collateral arithmetic — and that arithmetic does not work the way it is usually retold. The broker does not have one boundary, it has two, and they mean different things. The first one takes away your right to open anything new. The second one creates an obligation to close what is already open — the broker's obligation, not yours, and it will not be put to you as a question.

What actually counts as collateral

The security you bought with Leverage is not the collateral. The collateral is the portfolio as a whole: liquid assets minus what you owe the broker. The word "liquid" here is a legal term, not an everyday one. An asset that is not on the list of marginal instruments does not serve as collateral at all — it can sit in the very same account and contribute nothing whatsoever to collateral value. Cash balances and currency are counted in, but every position is taken not at full value: a haircut is applied first.

The practical consequence is simple and not at all obvious: funding your account with a non-marginal asset does not improve your standing. Only what is recognised as collateral improves it.

The risk rate is a property of the security, not the broker's opinion

The size of the haircut is set by the risk rate. It answers a single question: how far can the price travel over the time it would realistically take to close the position without crushing it with your own selling? That means the rate contains both Volatility and Liquidity at once — taken separately, neither one explains the rate. A security may fluctuate moderately and still receive a harsh rate if there is simply nobody to sell that volume to.

The calculation procedure is set by Bank of Russia Directive No. 5636-U. The rates are computed by the clearing organisation; a broker is entitled to apply stricter ones, but never softer ones. From this follows a conclusion that overturns the usual picture of leverage: the same leverage on two different securities is two different positions in risk terms, not one and the same "leveraged trade".

The calculation starts not from the sum you deposited but from the current market value of the position — the one that changes every second of the trading session:

Clients, meanwhile, are sorted into categories by risk level, and the category determines which rates your margin is computed at: under the standard level the requirements are stricter, under the elevated level they are softer. The classification criteria are based on assets and trading experience and are set by the same Directive, while the specific thresholds are to be checked in your brokerage agreement, not in an article.

Two margins and two thresholds

Initial margin is a sum across the entire portfolio: each position is multiplied by its own initial risk rate. Minimum margin is computed the same way but at the minimum rates, and it is always smaller than the initial one. This is calculated across the whole portfolio rather than per position: offsetting positions in the same security partly cancel each other out.

Then come two thresholds, and the difference between them is the single most confused point in the whole subject.

The threshold on initial rates is portfolio value minus initial margin. While it stays positive, you may open new uncovered positions. Once it goes negative, no more opening is allowed, and the broker issues a margin requirement. Nothing has been touched yet: you still have a choice — add funds or close part of the exposure yourself.

The threshold on minimum rates is portfolio value minus minimum margin. Once that one goes negative, the choice is gone. The broker is obliged to execute trades itself, returning the threshold to positive territory. In a broker's app these two thresholds are usually labelled NPR1 and NPR2.

These are precisely Margin call and Forced liquidation — two different events, not two names for one.

Why the mechanism amplifies the very move that triggered it

What operates here is positive feedback, and it deserves to be called by its name. The price falls — volatility rises. Volatility rises — risk rates are raised. Rates are raised — required margin grows on an unchanged position, and the threshold drifts downward without a single new trade. The threshold crosses below zero — forced selling begins. The selling pushes the price further down, and the loop closes.

Not one link in this chain is an error or a piece of bad luck: each works exactly as designed. Together, though, they form an amplifier rather than a stabiliser. Hence an observable property of the market — margin positions are closed in batches and on the same day, not evenly and one at a time.

A position costs money every single day

Carrying an uncovered position overnight is a separate transaction: Repo or a swap. There is a charge for it, and it accrues per calendar day, weekends and public holidays included. For a position that is "simply waiting for its moment", this is a negative constant in the return, working regardless of whether you turn out to be right.

There is a tax tail to this as well. The long-term holding exemption requires holding a security continuously for 3 years. A position that is paid for daily rarely survives to that horizon on economics alone, and a Short selling does not qualify for the exemption in principle — there is no ownership there, there is a debt.

The short position and the record date

In a short position you owe a security, not money. Everything due to its owner is due to whoever lent it to you. On the Record date the dividend amount is debited from you in favour of the lender.

This is a fundamentally different kind of loss from a price move: it arrives on a calendar and is known in advance. The nearest record dates on the Russian market are below:

The full schedule with amounts and payment history is in the Russian market dividends section. Brokers, moreover, frequently tighten their terms on short positions ahead of a record date, up to a complete ban: that is a condition of your agreement, not a property of the market, and it has to be checked with the broker.

What our data does not contain — and it is worth saying so plainly

We do not hold current risk rates or the list of marginal securities. Both are parameters of clearing and of a specific broker: they change during the trading day, differ from broker to broker, and live inside the broker's trading system rather than in market data. Any source publishing "the risk rate for a security" separately from your own broker is showing you somebody else's number.

What we do hold is the raw material those parameters are made from: volatility, depth of history and turnover for every security in the catalogue, plus the corporate events calendar. You can vet a security before an uncovered trade in the stock catalogue, and the liquid part of the market is filtered out by a ready-made set:

Definitions of the terms used here are collected in the glossary, and price and turnover behaviour can be examined before deciding in the terminal.

Four questions before your first uncovered trade

1. What risk rate applies to this security at your broker today, and when was it last changed?
2. What price move takes the portfolio from the margin-requirement zone into the forced-liquidation zone — do you know that level before opening the position, rather than after the call?
3. What does carrying the position cost over the intended holding period, and how does that sum compare with the move the position is being opened for?
4. What happens to the position if you are unreachable for a day? The answer is already known: it will be closed without you, at whatever price the market happens to offer.

Leverage does not make a correct forecast more profitable. It makes the time in which the forecast is obliged to come true finite — and the one who sets that deadline is not the one who opened the position. Every other consequence of margin trading is derived from there.