Forex Brokers Hedging requires 50% or 1/2 of the Margin

Margin is required upon hedging isn't something new.
On 2012, FXCM have made an announcement before

FXCM Makes Margin Changes to Hedged Positions
I assume this post will start a debate on whether hedging positions even makes sense as you in essence pay the spread twice to flatten your position. But for those traders outside of the US, being able to have a hedged (simultaneous short & long positions) is often a big deal.

FXCM announced that it is updating its margin requirements for hedged positions starting December 2, 2012. Under the new rules margin will be acquired for one of the sides of the hedged position, or 50% of the overall trade. Previously, hedged positions were deemed flat with no margin required. When asked about the reasoning behind the policy change, Jaclyn Klein, Vice President of Corporate Communications at FXCM, answered “Under the current system where no margin is required, some traders have inadvertently opened positions that were disproportionately large compared to the size of their account. In some cases clients have received margin calls when closing one side of the position (which would then trigger an added margin requirement for the remaining un-hedged side).”

Apparently, too many clients were getting their accounts liquidated after hedging their losers, losing money on other positions, and then closing the profitable side of the hedged position.

While FXCM’s margin change isn’t ‘big’ news, and most brokers will tinker with their requirements at one time or another, it does point out the importance of devoting time to margin and understanding how it affects trader behavior. Unlike other back office aspects, margin settings are often implemented on an instrument by instrument level or through smaller subset groups. Therefore, mistakes can occur with brokers implementing the correct margin rates to one symbol but not to another.

- See more at: http://forexmagnates.com/fxcm-makes-margin-changes-to-hedged-positions/#sthash.Dq1PmsSg.dpuf

What and how does it work?

1. I SELL a 0.1 lot, XAUUSD (GOLD) position, which the Leverage is usually 1:100 for Metals. Notice that the "Margin: 129.25". This means the current used margin is "129.25" (round up from the price enter at 1292.46)

 2. I then BUY 0.1 lot, XAUUSD. The margin remain almost unchanged. Current used margin is "129.26". Because 50% margin is required for XAUUSD. So 2 total required margin divide by 2 brings back almost the same amount when orders is done around the same price.

 3. When I hedged again, margin will double up.

Why is FXCM doing this? Here’s what their representative had to say:

Under the current system where no margin is required, some traders have inadvertently opened positions that were disproportionately large compared to the size of their account. In some cases clients have received margin calls when closing one side of the position (which would then trigger an added margin requirement for the remaining un-hedged side).

So basically, what is happening is that some traders are building up “hedges” which are much too large, then getting burned by margin calls when they unwind them (the Forex Magnates author suggest they are closing out the profitable legs and leaving the losing legs open, not realizing the losing position’s margin requirement). This whole thing, to my mind, is just another example of how traders can get themselves totally deluded by doing these “hedges”.

The “inadvertently” part of the above statement, to my mind, really speaks volumes to the whole hedging discussion. It implies either these traders are clueless about trade sizes, or they are horribly off-base in terms of risk management and/or margin requirements. Hedging is thus masking serious trading deficiencies.

FXCM is actually doing traders a favor by putting these margin requirements in place, helping the foolish avoid blowing themselves up. It would be better if they just scrapped “hedge” accounting (and really “hedging” is just about a different way of accounting for gains and losses).