What is ‘Federal Call’
A special type of margin call requiring a trader to deposit sufficient cash in order to meet federal requirements on the amount of credit that brokers may extend. These margin requirements are set by Regulation T of the Code of Federal Regulations, Title 12 – Banks and Banking. Currently the margin requirements are 50% for equities. For short sales, the margin requirement is between 100% and 150% of the current market value of the security being sold short. Regulatory authorities has the power to change these margin requirements as they deem necessary.
Explaining ‘Federal Call’
The purpose of Regulation T and federal calls are to moderate the amount of financial risk present in the securities markets. Since using margin amplifies both gains and losses relative to the initial investment, a broad overuse of margin has the potential to cause instability in financial markets as a whole. Since disruptions in the financial markets can interfere with the broader economy, regulators wish to have the controls necessary to promote orderly market functioning.
Further Reading
- An empirical comparison of published replication research in accounting, economics, finance, management, and marketing – www.sciencedirect.com [PDF]
- The call loan market in the US financial system prior to the Federal Reserve System – papers.ssrn.com [PDF]
- The financial market effects of the Federal Reserve's large-scale asset purchases – www.ijcb.org [PDF]
- Assessing regional economic stability: a portfolio approach – search.proquest.com [PDF]
- Risk-shifting incentives of depository institutions: A new perspective on federal deposit insurance reform – www.sciencedirect.com [PDF]
- The financial crisis of 2008: A clarion call to include economic policy and financial illiteracy on public administration's intellectual radar screen – www.tandfonline.com [PDF]
- The Perfect Storm: How Mortgage-Backed Securities, Federal Deregulation, and Corporate Greed Provide a Wake-Up Call for Reforming Executive Compensation – heinonline.org [PDF]
- The theory of public finance in a federal system – www.jstor.org [PDF]
