How Does the Initial Margin Requirement Affect Market Liquidity?
A high initial margin requirement reduces market liquidity. It demands more capital from traders to open positions, which limits the number of contracts that can be opened and thus reduces the total open interest and trading volume.
Conversely, a low initial margin encourages more trading and higher leverage, thereby increasing market liquidity.
Glossar
Open Interest
MarketExposure ⎊ Open Interest represents the total notional value of all outstanding, unsettled derivative contracts ⎊ such as options or perpetual futures ⎊ that have not yet been closed out or exercised.
Margin Requirement
Collateralization Standard ⎊ Margin Requirement is the minimum amount of collateral, expressed as a percentage of the notional value, that a trader must deposit to open or maintain a leveraged derivatives position, ensuring the exchange has a buffer against adverse price movements.
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.
Initial Margin Requirement
Definition ⎊ Initial margin requirement specifies the minimum amount of capital a trader must deposit into a margin account to open a new leveraged position in a derivative contract.