What Is House Call?
A House Call in finance refers to a demand by a brokerage firm that an account holder deposit additional cash or securities into their margin account. This situation typically arises in the realm of margin trading, which falls under the broader category of securities trading and investment practices. A House Call is triggered when the equity in a client's margin account falls below the maintenance margin required by the brokerage firm. If the client fails to meet this demand within a specified timeframe, the firm may proceed with the forced liquidation of positions in the account without further notice.,5
History and Origin
The concept of a House Call is intrinsically linked to the history and evolution of margin trading regulations. While the specific term "House Call" might be an industry colloquialism, the underlying regulatory demands stem from long-standing rules designed to ensure the stability of the financial system and protect both investors and brokerage firms from excessive losses. In the United States, a key regulation influencing margin requirements is Regulation T, established by the Federal Reserve Board. This regulation sets rules for the extension of credit by brokers and dealers to customers for the purchase of securities, including initial and maintenance margin requirements. The implementation of such regulations over time has led to standardized practices for brokerage firms, enabling them to protect their interests by issuing demands like the House Call when client account values decline.4 Historical discussions regarding margin requirements often trace back to efforts to manage market volatility, as explored by institutions like the Federal Reserve Bank of San Francisco.
Key Takeaways
- A House Call is a formal demand from a brokerage firm for an investor to deposit additional funds or securities into a margin account.
- It is triggered when the equity in the margin account falls below the brokerage's stipulated maintenance margin level.
- Failure to meet a House Call within the designated period typically results in the forced liquidation of the investor's securities by the brokerage.
- The primary purpose of a House Call is to mitigate risk for the brokerage firm and ensure that the investor maintains sufficient collateral for their borrowed funds.
- It differs from an initial margin call, which occurs at the time of purchase to meet minimum equity requirements.
Formula and Calculation
A House Call is not a formula in itself but rather an action triggered by a specific calculation related to the investor's margin account equity. The core calculation involves comparing the actual equity in the account to the required maintenance margin.
The equity in a margin account is generally calculated as:
The maintenance margin requirement, which varies by brokerage and security, is typically a percentage of the current market value of the securities.
A House Call is issued when:
For example, if an investor uses leverage to buy $10,000 worth of securities on margin with a 50% initial margin and a 30% maintenance margin, they initially put up $5,000 and borrow $5,000. If the value of the securities drops to $7,000, their equity becomes $7,000 (market value) - $5,000 (loan) = $2,000. The maintenance margin required would be $7,000 * 30% = $2,100. Since $2,000 (current equity) is less than $2,100 (maintenance margin required), a House Call would be triggered.
Interpreting the House Call
Receiving a House Call is a critical signal for an investor engaged in margin trading. It indicates that the value of the securities held in the margin account has declined significantly, eroding the investor's equity below the required threshold. Essentially, it means the investor's collateral for the borrowed funds is no longer sufficient to meet the brokerage firm's minimum requirements.
This situation demands immediate attention. Interpreting a House Call means recognizing the heightened risk management implications; the investor faces potential forced liquidation of their positions if they fail to deposit the required funds promptly. This liquidation can occur even if the investor believes the market will recover, potentially locking in losses. Therefore, a House Call serves as an urgent alert to either inject more capital or reduce exposure by selling assets.
Hypothetical Example
Consider an investor, Alex, who uses a margin account to purchase shares of Company X. Alex buys 1,000 shares at $50 per share, totaling $50,000. Their brokerage firm requires a 50% initial margin, so Alex pays $25,000 and borrows $25,000. The maintenance margin is 30%.
A few weeks later, the stock price of Company X drops to $30 per share. The market value of Alex's portfolio is now $30,000 (1,000 shares x $30).
Alex's equity in the account is:
Equity = Market Value of Securities - Debit Balance
Equity = $30,000 - $25,000 = $5,000
The maintenance margin required by the brokerage is:
Maintenance Margin Required = Market Value of Securities × Maintenance Margin Percentage
Maintenance Margin Required = $30,000 × 0.30 = $9,000
Since Alex's equity ($5,000) is less than the maintenance margin required ($9,000), the brokerage firm issues a House Call for $4,000 ($9,000 - $5,000). Alex must deposit $4,000 in cash or sell enough shares to cover the shortfall to bring the account back above the maintenance margin. If Alex fails to do so, the brokerage firm will liquidate a portion of the shares to meet the requirement.
Practical Applications
House Calls are a fundamental aspect of operating a margin account and have several practical applications across the financial landscape. For individual investors, understanding House Calls is crucial for managing their leveraged positions and avoiding unexpected forced sales. For institutional traders, they are a constant consideration in their risk management frameworks, often integrated into automated trading systems that monitor margin levels in real time.
Brokerage firms utilize House Calls as a protective mechanism to ensure clients maintain sufficient collateral against borrowed funds, thereby safeguarding the firm's capital. Financial advisors play a significant role in educating clients about the risks of margin and helping them manage their portfolio to prevent such calls. In the broader context of wealth management, advisors use sophisticated client relationship management (CRM) systems and adopt holistic approaches to provide comprehensive guidance, including monitoring clients' exposure to margin calls and advising on strategies to reduce risk. This proactive approach aligns with current trends in wealth and asset management, which emphasize personalization and integrated services to help clients navigate complex financial landscapes.
3## Limitations and Criticisms
While House Calls serve as a critical risk control for brokerage firms, they come with significant limitations and potential criticisms for investors. One major drawback is the forced liquidation of securities. When an investor cannot meet a House Call, the brokerage firm has the right to sell assets in the account, often at market prices, to restore the required margin level. This forced sale can occur at an inopportune time, locking in losses that might otherwise have been recovered if the investor had more time or capital to wait out a market downturn.
Furthermore, the sudden nature of a House Call can be highly stressful for investors, potentially leading to emotional decisions or exacerbating financial difficulties. Critics also point to the potential for a cascading effect during periods of high market volatility, where numerous House Calls could trigger widespread forced selling, further depressing market prices.
The rise of automated advisory services, such as robo-advisors, presents another layer of complexity. While these platforms can manage investments efficiently, they typically lack the human element of a financial advisor who can provide empathetic guidance or strategic financial planning during a House Call. In complex or emotionally charged financial situations, the absence of human judgment and personalized advice from a traditional advisor can be a significant limitation, as discussed in the context of human-centered financial futures.
2## House Call vs. Margin Call
The terms "House Call" and "Margin Call" are closely related and often used interchangeably, but it is important to understand their distinction. A Margin Call is a broad term for any demand from a brokerage firm for an investor to deposit additional funds or securities into a margin account to cover potential or existing losses. It signifies that the investor's equity has fallen below a required level.
A House Call is a specific type of margin call. It is the demand made by "the house" (the brokerage firm) when the equity in a client's margin account falls below the maintenance margin requirement. This distinguishes it from an initial margin call, which might occur if the investor fails to meet the initial deposit requirement when opening a margin position. Therefore, all House Calls are Margin Calls, but not all Margin Calls are House Calls. A House Call specifically pertains to maintaining the minimum equity level in a previously established margin account due to adverse market movements.
FAQs
What specifically triggers a House Call?
A House Call is triggered when the equity in an investor's margin account falls below the minimum maintenance margin percentage set by the brokerage firm or regulatory bodies. This typically happens when the market value of the securities purchased on margin declines significantly.
What happens if you don't meet a House Call?
If an investor fails to meet a House Call by depositing the required funds or additional securities within the specified timeframe (usually a few business days), the brokerage firm has the right to force the liquidation of some or all of the securities in the account. This sale occurs to bring the account's equity back up to the maintenance margin level, and it can happen without further notice to the investor.
Is a House Call the same as an initial margin call?
No, a House Call is not the same as an initial margin call. An initial margin call occurs at the time of purchasing securities on margin if the investor doesn't meet the initial equity requirement. A House Call, on the other hand, is a subsequent demand triggered by a decrease in the value of the margined securities after the initial purchase, bringing the account below its maintenance margin.
Can a financial advisor help avoid a House Call?
Yes, a financial advisor can help clients manage their accounts to potentially avoid House Calls. They can provide guidance on appropriate risk management strategies, monitor account balances, and advise on portfolio adjustments or alternative funding options to prevent the equity from dropping below the required maintenance margin.
What is the role of regulation in House Calls?
Regulatory bodies like FINRA and the Federal Reserve play a crucial role by setting rules for margin trading, including minimum initial and maintenance margin requirements. For instance, Regulation T governs the extension of credit by brokers and dealers. These regulations ensure that brokerage firms operate with sufficient safeguards and that investors are aware of their obligations when trading on margin.1