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Variation Margin

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.

Margin Call

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.

Further Reading

Quality option profits, switching option profits, and variation margin costs: an evaluation of their size and impact on Treasury bond futures prices
www.jstor.org [PDF]
… Equations (6) and (7) below, which subtract the cumulative cost of financing variation margin payments from … where CVMI(az) = the cumulative cost of financing the variation margi from day 0 to … approach adopted for developing models to explain Tb futures price variations was to …

System and method for managing initial or variation margin via custodySystem and method for managing initial or variation margin via custody
patents.google.com [PDF]
… Equations (6) and (7) below, which subtract the cumulative cost of financing variation margin payments from … where CVMI(az) = the cumulative cost of financing the variation margi from day 0 to … approach adopted for developing models to explain Tb futures price variations was to …

The margins of US tradeThe margins of US trade
pubs.aeaweb.org [PDF]
… Equations (6) and (7) below, which subtract the cumulative cost of financing variation margin payments from … where CVMI(az) = the cumulative cost of financing the variation margi from day 0 to … approach adopted for developing models to explain Tb futures price variations was to …

Central clearing and collateral demandCentral clearing and collateral demand
www.sciencedirect.com [PDF]
… Equations (6) and (7) below, which subtract the cumulative cost of financing variation margin payments from … where CVMI(az) = the cumulative cost of financing the variation margi from day 0 to … approach adopted for developing models to explain Tb futures price variations was to …

Corporate performance in the East Asian financial crisisCorporate performance in the East Asian financial crisis
academic.oup.com [PDF]
… Equations (6) and (7) below, which subtract the cumulative cost of financing variation margin payments from … where CVMI(az) = the cumulative cost of financing the variation margi from day 0 to … approach adopted for developing models to explain Tb futures price variations was to …

Debt denomination, exchange-rate variations and the margins of tradeDebt denomination, exchange-rate variations and the margins of trade
www.tandfonline.com [PDF]
… Equations (6) and (7) below, which subtract the cumulative cost of financing variation margin payments from … where CVMI(az) = the cumulative cost of financing the variation margi from day 0 to … approach adopted for developing models to explain Tb futures price variations was to …

Spectral risk measures with an application to futures clearinghouse variation margin requirementsSpectral risk measures with an application to futures clearinghouse variation margin requirements
arxiv.org [PDF]
… Equations (6) and (7) below, which subtract the cumulative cost of financing variation margin payments from … where CVMI(az) = the cumulative cost of financing the variation margi from day 0 to … approach adopted for developing models to explain Tb futures price variations was to …

Q&A About Variation Margin

How do you calculate your initial requirement for variation margin?

You calculate your initial requirement for variation margin by multiplying the number of contracts you hold by $1000.

When might you need a variation margin?

A variation margin may be needed when investments experience significant movement and price changes in the associated shares.

What is variation margin?

Variation margin is a form of collateral that the broker requires from its customers.

What are some uses for variation margin?

Variation margins can be used to bring equity accounts up to the required minimum, and allow them to function as collateral against other activities in which an investor participates.

What is required to be done after calculating your initial requirement for variation margins?

After calculating your initial requirement for variance margins, you should deposit it into an account at the clearing firm or exchange where you trade futures.

How does variation margin work?

Variation margin works by reducing exposure created by carrying highly risky positions.

What does variation margin protect against?

Variation margin protects against losses in futures trading.

Who are the parties involved with variation margin?

The parties involved with variation margins are brokers, investors and exchanges.

What does it mean when a brokerage requires additional funds from an investor?

It means that the brokerage has enacted a "margin call" requiring the investor to contribute additional funds to meet the required minimum. If unable, they will sell off securities held in account until amount is met.