Notional funding allows Forex managed account customers to fund a fraction of their accounts face value with actual cash.  For example, if a customer opens a $1-million account and funds the account with $250-thousand of real cash, the notional funding in the account is  $750-thousand.  The trader who is managing the account might leverage the accounts face value 3-times, or $3-million.  As long as the $250-thousand covers the margin requirements of the broker where the account is domiciled, the cash in the account

Creative Account Funding

would cover the notional funding.  If the money in the account were to decrease, for any reason, including trading losses or the debiting of management and incentive fees, the client might be required to send more cash to the broker to support the Forex traders positions in the account.  Also, if the broker were to change its margin requirements, due to capital or regulatory changes, the owner of the Forex managed account would have to send more cash to support the same size positions.

One of the main advantages of notional funding is the offsetting of credit risk.  If the broker, where the Forex managed account resides, has the reporting structure and adequate margin requirements, then notional funding would allow the client to send a fraction of the face value of the account.  By sending less cash, the client is not taking as much credit risk with the broker as he would be if he sent the entire face value of the account to the broker in cash.  The excess money would reside in his bank account of he could put it to work in another investment.  It is important to remember that, when notional funding is used in a Forex managed account,  incentive fees are charged on the accounts face value and the cash in the account will fluctuate at the same dollar value as the face value.

Notional funding and managed Forex Accounts go well together.