Global Securities Markets: Navigating the World's Exchanges and OTC Markets

Chapter 8

Margin

“Margin” comes from the Latin word meaning boundary space. The margin on this page is the space between the edge of the page and the type. Printers always keep a margin so that the typeset does not run off the edge of the paper. Similarly, a broker, when it extends credit, keeps a margin, so that the value of securities collateralizing the loan exceeds the loan amount. The amount of collateral required by the broker above the loan amount is margin. An investor who gives over collateral to a broker-dealer in exchange for a loan from the broker-dealer does so under a margin agreement that allows the broker-dealer to (1) pledge a portion of the securities to a bank in order for the broker-dealer itself to borrow money from the bank with their customers’ securities as collateral, or (2) loan out a portion of the securities to a third party. In years gone by, a customer was sometimes allowed, as a matter of custom, to eliminate the broker's right to loan securities to others (thus preventing his own broker from facilitating short sales in the margined stock by third parties). As a matter of practice and regulation, brokers require that margin be posted1 sufficient to cover the customer's margin debt in the event the collateral needs to be sold to satisfy the loan. Of course, as prices rise and fall, the boundary space for protection must be adjusted.2

On a historical note, one of the conclusions of the Pecora investigation in the aftermath of the 1929 crash was that ...