Initial margin

Understand the idea

A calculation estimates adverse movements over a specified close-out horizon under the applicable model or schedule. The agreement and rules govern eligible collateral and how it is held. For covered non-cleared derivatives, initial margin is distinct from variation margin, which addresses exposure already created by current market values. Increasing margin requirements can tie up assets and create funding pressure for participants.

An example

Imagine a contract with no current amount owed but a hypothetical initial-margin requirement of US$100,000. That collateral protects against future movements during default management. Later, the contract becomes worth US$20,000 to the other party, producing a separate variation-margin obligation under the arrangement. The US$100,000 buffer and US$20,000 current exposure serve different purposes; neither is automatically a realised trading loss.

Sources

• BIS: Margin requirements for non-cleared derivatives

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