What Are the Initial Margin and Variation Margin, and How Do They Protect the Clearing House?
Initial margin is collateral collected from a member when a position is opened, acting as a performance bond or down payment. It is designed to cover potential future losses in the event of a default.
Variation margin, on the other hand, is settled daily and covers the day-to-day profits and losses on open positions. Together, these margins ensure that the clearing house has sufficient funds to close out a defaulting member's positions without incurring a loss.
Glossar
Clearing House
Role ⎊ The Clearing House acts as a central counterparty (CCP) in traditional and centralized crypto derivatives markets, interposing itself between buyers and sellers to guarantee the performance of the contract.
Variation Margin Calls
Trigger ⎊ Variation Margin Calls represent a dynamic risk management mechanism integral to derivatives exchanges, particularly within cryptocurrency markets, functioning as a demand for funds to cover potential losses arising from adverse price movements.
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.