How Do Exchanges Set Initial Margin Requirements?
Exchanges set initial margin requirements based on the volatility and liquidity of the underlying asset, as well as the level of leverage offered. They use risk models, often based on historical price movements and stress testing, to determine the maximum potential loss over a settlement period.
Higher volatility and higher leverage lead to a higher initial margin requirement to ensure the exchange is protected against counterparty default. The margin is expressed as a percentage of the total contract value.
Glossar
Initial Margin Requirements
Collateral ⎊ Initial margin requirements represent the equity a trader must deposit with a broker or exchange to open and maintain a leveraged position, functioning as a performance bond against potential adverse price movements.
Historical Price Movements
Volatility ⎊ Historical price movements, particularly within cryptocurrency and derivatives markets, represent a quantifiable measure of dispersion around an average price, crucial for option pricing models like Black-Scholes and assessing risk exposures.
Portfolio Margining Systems
System ⎊ Portfolio Margining Systems are the technological infrastructure and regulatory frameworks implemented by exchanges and clearing houses to calculate margin requirements based on the aggregate risk of a trader's entire portfolio, rather than on a position-by-position basis.
Initial Margin
Collateral ⎊ Initial margin represents the equity a trader must deposit with a broker or exchange as a good faith commitment to cover potential losses arising from derivative positions, notably within cryptocurrency markets.