Variation Margin

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Variation margin is the payment made daily, or more frequently, between parties to a futures contract or other cleared derivative to settle gains and losses as market prices change.

Futures and many derivatives are marked to market at least daily. If the value of a position falls, the holder must pay variation margin to cover the loss. If it rises, they receive variation margin. This stops large unpaid losses from building up.

For example, a trader holds futures contracts whose value falls by 15,000 in one day. The trader must pay 15,000 of variation margin to the clearing house, which passes it to traders on the other side whose positions gained.

Variation margin differs from initial margin. Initial margin is a deposit posted when a position is opened, to cover potential future losses if a party defaults. Variation margin settles actual changes in value as they happen.

Since the 2008 financial crisis, rules have required variation margin to be exchanged on many over-the-counter derivatives as well as cleared ones. Large, sudden margin calls can create liquidity pressure, as seen during periods of market stress, when firms have had to raise cash quickly to meet them.

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