Risk glossary

In derivatives markets, variation margin is one of two types of collateral required to protect parties to a contract in the event of default by the other counterparty. It provides for changes in the market value of the trade or a portfolio of trades. VM payments are usually made daily, in cash, from the party whose position has lost value to the party whose position has gained value. The payments ensure mark-to-market losses from default are limited to the period since the previous VM payment.

For centrally cleared trades, counterparties post VM to the clearing house; in non-cleared trades, to each other.

See also Initial margin.

Click here for articles on variation margin.