What is ‘Variation Margin’
The variation margin is a variable margin payment made by clearing members to their respective clearing houses based on adverse price movements of the futures contracts these members hold. Variation margin is paid by clearing members on a daily or intraday basis to reduce the exposure created by carrying highly risky positions. By demanding variation margin from their members, clearing organizations are able to maintain a suitable level of risk and cushion against significant devaluations.
Explaining ‘Variation Margin’
A variation margin is used to bring an equity account up to the margin level. This margin, and the associated initial and maintenance margin, must be sustained by liquid funds associated with the investor’s account, allowing it to function as collateral against the other activities in which the investor participates. This is more likely to be required when investments experience significant movement and price changes in the associated shares.
The margin call involves the brokerage requiring the investor to contribute the additional funds to meet the required minimum. It is enacted when the value of the securities purchased falls below the initial margin. If the investor is not able to meet the margin call requirement, the brokerage can then sell off securities held in the account by the investor until the amount is met.
Maintenance Margin Requirement
The maintenance margin requirement refers to the amount of money an investor must keep in his margin account. This requirement gives the investor the ability to borrow from a brokerage. This fund functions as collateral against the amount borrowed by the investor.
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