Margin requirement is a financial concept related to the minimum amount in collateral that the issuer of a financial security requests from the buyer, to hedge against the risk of adverse price movements or the buyer defaulting.
In the foreign exchange markets, businesses, or individuals who wish to enter a spot FX contract are normally requested to deposit a minimum margin requirement.
It acts as a surety against transactional default and provides other parties to a transaction with confidence that the counterparty will fulfill its contractual obligations.
The margin requirement in currency exchange is normally in cash, deposited in a margin account. It is usually a percentage of the total amount to be transacted.
Should the margin requirement change, which is regularly the case in currency transactions as exchange rates change continuously, there is a margin call, whereby the counterparty must deposit the shortfall in order to meet the new margin requirement.