Margining

Margining is the process of posting and managing collateral to secure obligations arising from trading and funding activities. It is used to reduce credit risk between counterparties in markets where positions are financed or marked to market, such as futures, options, swaps, and securities lending. Margin requirements are typically set by clearinghouses, brokers, or regulators and depend on product type, liquidity, and volatility.

Two main components drive margining: initial margin and variation margin. Initial margin is the upfront collateral deposited to establish a position, serving as a buffer against potential future exposure. Variation margin, also known as mark-to-market margin, is exchanged regularly to reflect current unrealized gains or losses. The assets posted as margin must meet eligibility criteria and are often subject to haircuts or liquidity requirements.

Margining systems rely on ongoing valuation and daily settlement. If a trader’s account falls below the required level, a margin call is issued to restore funding; failure to meet calls can trigger liquidation of positions. In many markets, clearinghouses require both parties to post initial margins and may also collect funds into a default fund to cover extreme, unforeseen losses. Cross-margining may be used in related product families to reflect shared risk.

Regulatory frameworks establish minimum margin standards to bolster financial stability. For non-cleared OTC trades, international and local rules specify requirements for both initial and variation margin, including collateral quality, liquidity, and timely settlement. Margining involves operational considerations such as collateral valuation, asset liquidity, and dispute resolution over collateral eligibility.