What Is the Role of Initial Margin in Counterparty Risk Management?

Initial margin is the collateral required to be deposited by a trader before they can open a futures position. Its role is to serve as a financial buffer to cover potential adverse price movements until the next mark-to-market settlement.

By demanding this upfront collateral, the clearinghouse ensures that the trader has skin in the game, significantly reducing the risk of a loss that the trader cannot cover.