Chapter 04 · Section 4.1
Default on Margin
A margin call is the broker's request for the customer to deposit more money in the margin account. Usually the additional margin money must be deposited within 24 hours (in some cases less). What happens if the customer does not deposit the additional money required?
a) The broker may sue the customer in order to obtain the money. If the customer cannot pay, the broker has to bear the loss.
b) The broker may liquidate the customer's option positions. If a net loss remains, he uses the margin money to cover the loss.
c) The broker turns to the Clearing House, which acts as a guarantor for all open positions.
The broker is ready to hold the position on condition that sufficient margin is deposited.
If a customer's margin money is no more sufficient, the broker should not be ready anymore to take the risk of holding a short position on behalf of that customer.