Argentex Got Some Margin Calls

One niche financial service is getting rid of margin requirements. There are many financial products that require mark-to-market collateral. You enter into a foreign exchange forward contract in which you agree to pay me 100 euros in three months in exchange for 100 US dollars. If tomorrow the euro appreciates, so it would take $1.10 to buy €1, you will have a mark-to-market loss on this trade: You have agreed to pay me €100 for something that, today, is worth only €90.91. You have a loss of almost €9. You might decide not to pay me — after all, you can get $110 for your €100 elsewhere, so why pay me €100 for $100? — or you might be unable to pay me, if you have done a lot of these trades and they have moved against you and you’re bankrupt. And so it is traditional in many contexts for me to require collateral from you: If the trade moves against you by €9, you have to post €9 to a collateral account so I can make sure you’re good for it. (Depending on the type of product and our bargaining power, if the trade moves in your favor by €9, I might have to post €9 of collateral to you.)

You might find that annoying for various reasons. One is that it is just administratively annoying to have to have money move back and forth each day as exchange rates move. Another reason is that you have other uses for your money, and having to post some of it to me as collateral is costly. A third reason is that you might be a big levered bettor on foreign exchange rates, and if those rates all move against you at once you will face big margin calls and have to come up with a lot of money you don’t have. So it would be convenient, for you, to have a product that didn’t require collateral. You pay me €100 in three months, I give you $100 in three months, and whatever happens in between is none of our business. No collateral, just a contract that pays off in three months.