Initial and Variation Margin in Trading we analyze when we talk about trading and current position risks.
What initial margin?
Initial Margin represents the minimum balance that traders need to have in their accounts to open a forex trading position. It usually refers to the percentage of equity a margin account holder must contribute to securities purchase.
What is variation margin?
Variation Margin or maintenance margin or Mark To Market Margin represents an additional amount of cash you are required to deposit in your trading account after your position has taken sufficient losses to bring it below the “Maintenance Margin Total margin consists of initial margin and variation margin. .”
Total Margin = Initial margin + Variation margin
Initial and variation margin in stocks and futures trading
In such cases that you hear of the term initial margin being used, the margin indicates the minimum required amount required in the trader’s account for the trader to be permitted to conduct stocks and futures trades. When you hear a reference being made to the variation margin, a clearing member provides a margin payment presented to a clearinghouse. The payment is founded on the movements of prices regarding futures contracts possessed by the clearinghouse members.
There is the requirement for the clearinghouse members to make payments of variation margins, which are noted as being paid because it is day-to-day or intraday. This is necessary to reduce exposure to the risk of positions that carry high levels of risk, which are held by the clearinghouse. Therefore, conducting members’ requirement to pay variation margins results in the clearinghouse’s empowerment regarding maintaining the level of risk exposure overall at levels deemed suitable so that orderly payments are completed for all those who engage in trading.
There is the requirement for the members of the clearinghouse to make payments of variation margins, which are noted as being paid on the basis that it is day-to-day or that is intraday. This is necessary to engage in the reduction of exposure to the risk of positions that carry high levels of risk, which are held by the clearinghouse. Therefore, conducting the requirement of members to pay variation margins results in the clearinghouse’s empowerment regarding maintaining the level of risk exposure overall at levels that are deemed suitable so that orderly payments are completed for all those who engage in trading.
Usage of variation margin
It is acknowledged that there is the utilization of the variation margin to increase the level of the inflow of the capital that pertains to a margin account to a margin level that has been predetermined. This process is referred to as the maintenance margin. This is a vital element to consider when conducting the calculations about the variation margin. Liquid funds are required to sustain it to allow it to be applied for use in scenarios if there is the experience of losses in the future. This provides the solidified assurance that the clearinghouse will operate smoothly and efficiently.
Variation margin and factors
It is noted that various factors come to influence the variation margin. Such factors are pointed out as the movements of the anticipated prices, the established conditions of the market, and the kind of asset. The perception is that the payment of the variation margin is regarded as being required in such cases that the funds held within an account for the trading decrease below the funds desired for the maintenance margin. When there is the requirement to place more funds into the account, this is regarded as a margin call.
What is a clearing member?
When you hear a reference being made to a clearing member, this indicates that a brokerage firm engages in conducting the fulfillment of being a member of a self-regulating organization. The brokerage firm must also have membership within at least one key stock exchange of the United States. It may hold more than one such membership. There is the comprehension that a primary example of a clearing member is considered a futures broker.
Variation margin and clearinghouse
It is then noted that a clearinghouse is regarded as an organization that functions as an intermediary to assure that the obligations outlined for a contract are honored by both parties, which consider both the buyer and the seller. Hence, the reality is that a clearinghouse may serve in a third party’s role regarding options contracts and futures contracts. Also, the clearing mouse may conduct a wide array of functions, which take into inclusion performing reports for the data of trading, operating settlements for accounts that engage in trading, performing the clearance of trades, conducting the collection of margin payments, and also engaging in the regulation of the provision of instruments that are newly purchased.
Initial and variation margin futures contract conclusion
Give some consideration to the scenario in which a trader purchases a futures contract. For this contract, the margin that is indicated is five thousand dollars, as this is noted as the minimum amount of capital necessary for the sake of being able to conduct a trade. It is recognized that the maintenance margin may be set at an amount of four thousand dollars. This indicates that in such a case that the balance held in the account decreases to four thousand dollars, the one who is engaging in making trades is obligated to bring the account back up to five thousand dollars. This is related to the fact that the amount in the trader’s account has dropped to an amount classified as being not enough.
The differentiation regarding the indicated margin and the maintenance margin, which is noted as being in the amount of one thousand dollars, is recognized as the variation margin. Therefore, the reality is that the variation margin is considered the portion of the money necessary to assure that the account possesses the minimum required amount to conduct future trades.