Variation Margin

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Variation Margin
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Variation Margin the cash transfer that takes place after each trading day (and sometimes intraday) in most futures markets to mark long and short positions to the market. Unlike a forward contract that settles only when the contract matures, most futures contracts are settled daily by the payment of variation margin from the party who has lost money that day to the party who has made money.

If each point in the price of a contract is worth $1,000, and the futures price goes up by 1/2 point during a session, the short will pay the long $500 per contract in variation margin. Holders and sellers of futures options do not exchange variation margin under current margin procedures, but the ability to capture accumulated variation margin payments through affects the value of an American-style futures option[1].

All financial futures positions are marked to market on a daily basis. Where such procedures result in a net profit or loss situation per futures contract position, settlement between the ultimate position holding member or client and the clearing house takes place in the form of payments which in this case is termed variation margin[2].

Arrangement of variation margin

Transactions in the money market expose the cash-lending party to credit risk and repo is no exception to this. The presence of security may be viewed as reducing the inherent credit risk exposure; however, it does not remove the need for credit assessment and know your counterpart. A bank will assess each counterparty for its creditworthiness, as well as the quality of the collateral, and assign a net repo trading limit (net of repo and reverse repo). A margin rate will be agreed on the basis of this assessment. In classic repo, as traded under the GMRA master agreement, this includes initial margin and ongoing variation margin.

A variation margin arrangement will include[3]:

  1. daily marking-to-market of each stock that has been accepted as repo collateral. If there is a standard reference price this will be taken as the mark, otherwise a third-party price source will be used
  2. the level at which variation will be called, that is the threshold level below the initial margin point

Problem with variation margin

It can argued that variation margin in not completely free and without additional liquidity risk for two reasons[4]:

  • First, variation margin must be paid in relatively liquid securities or cash (indeed, CCPs typically allow only the latter) whilst some market participants will have access only to illiquid non-eligible assets. For example, consider an airline hedging its exposure to the price of aviation fuel via an oil swap or forward contract. The airline will make (lose) money on those hedges in the event of high (low) prices, which will be balanced economically by higher (lower) fuel costs over the period of the hedge.
  • A second problem with variation margin is the inherent delay caused by non-immediate posting (which can be days or at least hours). This interrupts the flow of variation margin through the system and causes funding liquidity risk. This effect will be particularly strong in volatile markets and even more so when there is a large asset price shock. Furthermore, central counterparties have a privileged position with respect to margin exchange and may therefore interrupt margin flow significantly for their own benefit.


  1. G.L. Gastineau, M.P. Kritzman 2005, p.327
  2. P. Parker 2010, p.393
  3. M. Choudhry 2010, p.135
  4. J. Gregory 2014, p.216-217


Author: Marlena Dopnik