Cross-margining involves placing margin from one financial vehicle into another account with a low margin to reduce overall risk. It is usually only done between similar markets, but some brokers may allow it between different markets. One account must have a low margin to participate, and there can be penalties if payments are not kept up.
Cross-margining is a way of taking the margin, or cost, of a financial vehicle and placing some of it into another account with a low margin. This can normally only be done in similar markets, such as between stocks, but some brokers may allow investors to do this between two different markets. In order to effectively participate in cross-margining, there must be another account that has very low margin and can accept the other margin without any problem. Primarily this is done to reduce the overall risk of trading and paying margins. When investors pay the remaining margin to the brokers, if they default, then the brokers can legally sell the investment vehicle and collect the money from the sale.
Most cross-margin deals can only be made between similar markets, such as futures. Some brokers may be willing to accept responsibility for this between two different markets, such as between futures and stocks, but this is rare. Crossing margin between two markets is often more difficult, may require more paperwork, and may not decrease risk as much as crossing with a similar market.
Just because an investor has two investment vehicles or accounts does not mean that he or she can participate in cross-margining. One of the accounts must have a low margin, below the maintenance value, or this cannot be done. The account with the highest margin does not need to have a very high margin to cross over, but this is common.
The general margin is usually lower after the cross margin, so this reduces risk and makes payouts easier. For example, if a derivative has been paid for, some money can be placed in the derivative without penalty. The derivative has already been paid for, so there is usually room to put the money in and the investor will not have to pay more.
There can be a major problem with cross-margin if the investor doesn’t keep up with the payments. The broker is not paid the full amount for the investment vehicle with the largest margin, so he or she has some ownership in it. This usually doesn’t come into play, but if the investor can’t pay the broker’s penalty for that vehicle, then the broker can sell it to recoup the losses. If the broker sells the investment vehicle and the investor was paying on time, this is illegal and the broker can be fined.
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