What is 'Variation Margin'
The variation margin is a variable margin payment made by clearing members to their respective clearing houses based on adverse price movements of the futures contracts these members hold. Variation margin is paid by clearing members on a daily or intraday basis to reduce the exposure created by carrying highly risky positions. By demanding variation margin from their members, clearing organizations are able to maintain a suitable level of risk and cushion against significant devaluations.
BREAKING DOWN 'Variation Margin'
A variation margin is used to bring an equity account up to the margin level. This margin, and the associated initial and maintenance margin, must be sustained by liquid funds associated with the investor's account, allowing it to function as collateral against the other activities in which the investor participates. This is more likely to be required when investments experience significant movement and price changes in the associated shares.
The amount required at any point when the variation margin is requested varies depending on the exact market conditions and price movement experienced at the end of the day. It can be affected by market conditions, especially high volatility, or any other activity that presents higher risk but is not necessary when risks are lowered. The variation margin payment of additional funds may be deemed necessary by a broker when the equity account balance falls below the maintenance margin or initial margin requirement. This request for funds is referred to as a margin call.
The margin call involves the brokerage requiring the investor to contribute the additional funds to meet the required minimum. It is enacted when the value of the securities purchased falls below the initial margin. If the investor is not able to meet the margin call requirement, the brokerage can then sell off securities held in the account by the investor until the amount is met.
Maintenance Margin Requirement
The maintenance margin requirement refers to the amount of money an investor must keep in his margin account. This requirement gives the investor the ability to borrow from a brokerage. This fund functions as collateral against the amount borrowed by the investor.
Maintenance margins may be set to any amount as required by the brokerage. For example, the Financial Industry Regulatory Authority (FINRA) requires the maintenance margin to be set at a minimum of 25%. Other brokerages can set higher minimums, such as 50%, depending on the level of risk and the investor involved.