Funds that a broker has to request from a client in order to have necessary margin deposited.
What is Variation Margin?
The term variation margin refers to a margin payment made by a clearing member to a clearinghouse based on the price movements of futures contracts held by the clearinghouse members.
Clearing members are required to pay variation margins on a day-to-day or an intraday basis to reduce the risk exposure of high-risk positions carried by clearinghouses. Thus, collecting variation margin from its members enables a clearinghouse to maintain the overall risk exposure at suitable levels such that orderly payments for all traders are facilitated.
The variation margin is used to bring up the capital inflow of a margin account up to the predetermined margin level. It is known that the maintenance margin is an important factor to consider while calculating the variation margin. The amount is usually lesser than the initial margin needed for making trades. It must be sustained by liquid funds so that it can be used as collateral in case of future losses. It ensures the smooth functioning of that clearinghouse.
Variation margin is dependent on multiple factors, such as the type of asset, prevailing market conditions, and expected price movements. The variation margin payment is deemed necessary once the funds in a trading account drop lower than the maintenance margin. The call for additional funds is known as the margin call.