Define ‘Initial Margin’ versus ‘Variation Margin’ in Derivatives Collateral

Initial margin is the collateral required to be posted by a party before a trade is executed. It is designed to cover the potential future loss that could occur before the position can be liquidated.

Variation margin is the collateral that is exchanged daily to cover the actual change in the value of the derivative position (mark-to-market loss or gain). Initial margin covers potential future exposure; variation margin covers current exposure.