Define “Margin Requirement” in the Context of Derivatives and Its Relation to Netting

Margin requirement is the collateral that a trader must deposit with a broker or clearing house to cover potential losses from adverse price movements in a derivatives position. Netting significantly reduces the margin requirement.

By offsetting gains and losses across multiple positions, the net exposure is lower, which in turn lowers the calculated potential loss and therefore the amount of collateral needed. This directly enhances capital efficiency.