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).
Glossar
Margin Netting
Collateralization ⎊ Margin netting, within cryptocurrency derivatives and options trading, represents a risk mitigation technique where multiple trades with the same counterparty are consolidated into a single net exposure, reducing the overall margin requirement.
Offsetting Risk
Action ⎊ Offsetting Risk is the deliberate strategic action of establishing a new financial position whose potential gains or losses are inversely correlated with the existing exposure, thereby neutralizing the portfolio's overall sensitivity to a specific market factor.
Netting
Calculation ⎊ This is the mathematical process of offsetting mutual obligations between two counterparties across a portfolio of derivative contracts to determine a single net liability or asset position.
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.
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.