Fundamentals of A Margin Call: Variation Margin vs. Initial Margin

If you routinely trade on margin, using broker leverage to magnify your returns, margin calls should be viewed as an expected event. Every position has the risk of moving against you to the degree that your clearing member will ask you to post additional funds to cover their obligations to their clearing house. Variation margin is the amount the clearing member must post to the clearing house to cover adverse price movements or changes in market volatility.

What is realized variation margin?

Realized variation margin is the change between the price at the last margin review (either the day the trade was made or the last date margin was updated) and the closing price today. These amounts are settled on a daily basis.

If the client is unwilling or unable to meet the margin call, the securities broker (clearing member) can close out an open position to raise the funds to meet the margin call. This can be done without your approval and they have discretion to decide which positions are closed out. This is referred to as a forced sale.

What is initial margin and variation margin?

Initial margin is the margin requirement that you met to open the original position. Once the trade is open, the investor must maintain a maintenance margin in their margin account to ensure the brokerage firm is safe from counterparty risk.

Variation margin is the difference between the initial margin requirement required to open the trade and the amount required to keep the position open once the market moves.

The margin requirements for the US markets are set by FINRA, a private corporate set up as a self-regulating entity for the securities industry. FINRA margin rule 4210 defines the margin requirements for different types of securities (including stocks, options, and futures contract products). Swaps (derivative contract) are regulated by the ISDA (international swap dealer association). Other rules apply to non-cleared products (OTC derivatives, non cleared swaps, non cleared derivatives). The specifics of the variation margin protocol will vary by product and business.

How Do you Cover a Margin Call?

Generally speaking, a margin call can be met through one of three ways:

  • Deposit cash collateral (additional margin) to meet the maintenance margin requirements for that particular security
  • Deposit securities (not margined) to serve as eligible collateral for the margin position
  • Close out any margin positions to the degree required to bring the account back into compliance with the maintenance margin requirements.

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