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Variation Margin

VARIATION MARGIN is the amount of funds to be paid (received) by the parties to a transaction with derivatives in connection with the revaluation of a position in these financial instruments. Variation margin is the difference between the current and estimated value of the derivative.

When making derivatives transactions, neither of the parties to the transaction are required to pay the contract price in full. Instead, they pay the initial margin or collateral to the organizer of the auction (the exchange). Previously acquired contracts can be sold or closed by a transaction party at any time. The value of contracts on the exchange market is revalued at a specified frequency. Profits or losses on these contracts are locked in at clearing. A need appears to maintain the margin (collateral) at a constant level, which takes into account the market quotation of the derivative.  Thus, variation margin is part of the risk management system in the exchange derivatives market. Margin payments in such a system ensure that the parties to the transaction fulfill their obligations under the contract.

The algorithm for calculating variation margin is set by the exchange. The variation margin size depends on the settlement prices on the exchange, minimum price step, cost of the minimum price step, indicative exchange rates (when the contract currency and the payment currency differ).

When calculating variation margin, brokers may charge a premium from their clients.

An example algorithm for calculating variation margin when buying futures:

  1. The difference between the price of a futures contract at the time of signing and the market quotation at the first clearing.
  2. The difference between the contract price at the first clearing and the current market quotation at the second clearing.
  3. Each subsequent clearing is the difference between the price applicable at the previous clearing and the current market quotation.
  4. At the time of closing the futures contract - between the price of the asset at the previous clearing and the closing price of the contract.
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