Posted in Finance, Accounting and Economics Terms, Total Reads: 300
Definition: House Maintenance Requirement
The internal rules of a brokerage house that stipulate the minimum amount of equity in the form of money and securities that must be present as an equity in a customer’s margin account. Regulators such as Federal Reserve’s Regulation T, National Association of Securities Dealers (NASD) or Financial Industry Regulatory Authority (FINRA) already have a regulation regarding the minimum amount of equity required in a margin account which is also known as maintenance margin which is 25%.
However, the brokerage may not be willing to take the great risk associated by allowing only the minimum amount and wants to have a more strict maintenance margin requirement. To cover this risk, brokerages most often can increase this requirement based on the leverage taken, type of account holders and the asset class where investment is, geography of the investment (international investments generally have higher house maintenance margins). There is no restriction on the maximum amount of house maintenance requirement. The level of this increased requirement is generally dependent on the brokerage firms’ appetite for risk. Brokerage houses are known to have imposed house maintenance requirement of up to 50% also sometimes.
By doing this, the brokerage house limits its potential losses if the margin account holder is unable to make gains and loses all his invested money. Thus, when the investor is unable to meet his margin call and loses all his money, his assets in the account can be liquidated.