variation margin

During periods of great market volatility or in the case of high-risk accounts, additional margin deposited by a clearing member firm to an exchange. Chicago Board of Trade glossary

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margin, gross margin, net margin, security margin, variation margin

(1) An amount of cash or collateral that a buyer or borrower must provide in excess of value owed to that buyer or borrower by a seller, lender or depositor. Ensures performance by the buyer or borrower. Initial margin is posted at inception. Variation margin is the amount of any additional margin needed to correct deficiencies in the currently posted margin.

(2) The amount by which the coupon rate for a floating- or variable- rate financial instrument differs from the defined index for that coupon rate. For example, if a floating-rate note requires that the coupon rate be set at 250 basis points above 30-day LIBOR, the gross margin is 250 basis points. Can also be the amount added to, or subtracted from, the index in determining the instrument's fully indexed rate. Investors in adjustable rate mortgage-backed securities (MBSs) receive a coupon rate that is lower than the fully indexed rate because the cost of servicing, the servicing spread, is deducted. The gross spread minus the servicing spread is called the net margin or the security margin.

See index and servicing.

(3) In a firm's profit and loss statement, margin is the difference between sales price and the cost of goods sold. It may be expressed as a dollar quantity or as a percentage of the cost of goods sold. American Banker Glossary

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An additional required deposit to bring an investor's equity account up to the margin level when the balance falls below the maintenance margin requirement. Bloomberg Financial Dictionary

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The profits or losses on open positions which are calculated daily in the mark to market process and then paid or collected. Variation margin is calculated at the end of each business day by LCH, and then collected the next business day via the PPS system. Unlike initial margin, which is kept by the clearing house until a position is closed out (See also close out) or reaches expiry, variation margin is merely collected from the loss making side of the contract by the clearing house, and then paid to the profit making side of the contract. Dresdner Kleinwort Wasserstein financial glossary

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Profits or losses on open positions in futures and options contracts which are paid or collected daily. Exchange Handbook Glossary

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Actual debits (losses) and credits (profits) arising from the mark-to-market process on open futures and options positions are posted as variation margin. In the event of a shortfall, as a result of an adverse price move, a call will be made on clearing members for additional funds to cover the realised loss. Conversely, realised profits may be called from the clearing house. LIFFE

See margining. LIFFE

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   Variation margin is collected on a daily basis by clearing houses or brokers to ensure margin requirements on a particular transaction keep pace with subsequent market movements. It represents a running profit or loss on a contract. It is calculated by revaluing all positions with reference to the closing prices each day.

   ► See also Margin, Mark to Market.