What Is ‘Margin Netting’ and How Does It Reduce Initial Margin Requirements?

Margin netting is the process of calculating the total initial margin requirement for a portfolio by recognizing the offsetting risk between different positions. Instead of simply summing the margin for each position (gross margin), the calculation accounts for the correlation between assets.

If two positions are negatively correlated (e.g. a long and a short position), the risk is partially offset, resulting in a lower total initial margin requirement (net margin).