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.