Margin requirement is the minimum amount of assets that a client must have on the balance before buying on margin.
In order to calculate the margin requirement of a given portfolio, EXANTE uses an in-house risk management system, a variation of SPAN®, the Standard Portfolio Analysis of Risk. The SPAN® methodology consists of a series of portfolio "what-if"-scenarios that yields the worst possible performance loss a portfolio can suffer over a specific time horizon. To do this, SPAN® uses a predefined set of parameters reflecting the market conditions of traded contracts.
SPAN® is based on the division of financial instruments on client’s account into groups of instruments that share the same underlying asset, called combined commodity . SPAN® then performs some calculations on each combined commodity separately, and some on all combined commodities in the portfolio. As a final result SPAN® produces a margin requirement, which is the loss of value of the portfolio in a worst-case risk scenario.
The general formula for the initial margin is:
Margin = max(Scanning Risk + Inter-month Charge – Inter-commodity Credit, Short Option Minimum, Concentration Margin)
What is 'buying power'?
In case you deposit 10,000 EUR to your margin account and you choose to trade the instrument with margin requirement of 50%, that would mean you have 20,000 EUR worth of buying power. If you buy 5,000 EUR worth of stock, you will still have 15,000 EUR of buying power remaining. You have enough cash to cover this transaction and haven't tapped into your margin. You start borrowing the money only when you buy securities worth more than 10,000 EUR.
Note: the buying power of a margin account changes constantly depending on market conditions.