Variation Margin

What is Variation Margin

The variation margin is a variable margin payment made by [clearing members](/memberfirm, for example, a futures broker, to their separate clearing houses in view of 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 made via carrying high risk positions. By requesting variation margin from their members, clearing houses are able to keep a suitable level of risk which considers the orderly payment and receipt of funds for all traders utilizing that clearing house.

Rudiments of Variation Margin

Variation margin is accustomed to get the capital an account up to the margin level. This margin, and the associated initial and maintenance margin, must be supported by liquid funds permitting it to function as collateral against any losses that might result from trades in progress.

For instance, assuming a trader gets one futures contract, the initial margin on that contract might be $3,000. This is the amount of capital they need to have in their account to take the trade. The maintenance margin might be $2,500. This means in the event that the money in the account dips under $2,500 the trader is required to top up the account to $3,000 once more, as they have lost $500 on their position(s) which reduces the buffer in their account to an unacceptable level. The amount expected to carry the account to an acceptable level to guarantee future trades is known as variation margin.

Presently, envision that a broker has huge number of traders, all in various positions and both making and losing money. The broker, or clearing member, must consider this large number of positions, and afterward submit funds to the clearing houses which covers the risk taken by the entirety of their trades.

The amount of variation margin differs relying upon the specific market conditions and price movement experienced throughout the span of the day. The variation margin payment of extra funds might be considered significant by a broker when the equity account balance falls below the maintenance margin or initial margin requirement. This request for funds is alluded to as a margin call.

Margin Call

A margin call is the point at which a broker requires an investor to contribute extra funds to meet the required least margin amount. It is sanctioned when the account losses money, or extra positions are taken, making the equity balance fall below the required least for holding those positions. In the event that the investor can't meet the margin call, the brokerage can then sell the protections in the account until the amount is met or risk is reduced to an acceptable level.

Maintenance Margin Requirement

Maintenance margin is an important factor to consider while working out variation margin. It alludes to the amount of money an investor must keep in his margin account while trading stocks. It is generally not exactly the initial margin required to make trades. This requirement empowers the investor to borrow from a brokerage. This margin functions as collateral against the amount borrowed by the investor.

The Financial Industry Regulatory Authority (FINRA) requires the maintenance margin to be set at least 25% for stocks. Different brokerages can set higher essentials, for example, half, contingent upon the level of risk and the investor implied.

While trading futures, maintenance margin means something else. It is the level at which an investor is required to top up their account to the initial margin amount.

Illustration of Variation Margin

Suppose a trader purchases 100 shares of stock ABC for $10 each. The initial margin set by the broker for purchase is half. This means that the broker must have $500 in his account consistently to make trades. Likewise accept that the maintenance margin is $300.

On the off chance that the price of ABC falls to $7, the $300 in losses in the trade are deducted from the initial margin account. This means that initial margin account balance is presently $200, which is below the $300 maintenance margin amount indicated before. The new initial margin amount is $350 (half of $700). The trader would have to finish off up their account with $150 to trade.

Features

• Variation margin alludes the amount of funds expected to guarantee margin levels for trading.
• It relies upon different factors, including expected price movements, type of asset, and market conditions.