What Is “Initial Margin” and How Is It Calculated for a Futures Contract?

Initial margin is the collateral required to be posted by a trader to open a new futures position. It is calculated by the clearing house using a risk-based model (e.g.

VAR or SPAN) to cover the potential loss that could occur on the position over a specified time horizon, typically one day, with a high degree of confidence (e.g. 99%).

It ensures the clearing house is protected from the moment the trade is executed.