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Variation Margin: A Comprehensive Guide to Its Legal Implications
Definition & Meaning
Variation margin refers to the daily payments made between parties involved in futures and options contracts based on the profits or losses of their open positions. This process ensures that any adverse price movements in these positions are accounted for on a daily basis. Essentially, it involves a clearing member making payments to a clearing organization to cover losses or receiving payments for profits, calculated separately for customer and proprietary positions.
Table of content
Legal Use & context
Variation margin is primarily used in financial and trading contexts, particularly involving futures and options contracts. It is relevant in areas such as securities law and financial regulation. Individuals or entities that engage in trading these contracts may need to understand variation margin to manage their financial risk effectively. Users can utilize legal templates from US Legal Forms to create agreements or documents related to trading and margin requirements.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
For instance, if a trader holds a futures contract that decreases in value, they may be required to pay a variation margin to the clearing organization to cover the loss. Conversely, if the contract increases in value, the trader may receive a payment. (Hypothetical example)
Comparison with related terms
Term
Definition
Key Differences
Initial Margin
The upfront payment required to open a position in futures or options.
Initial margin is paid at the start, while variation margin is adjusted daily based on position performance.
Maintenance Margin
The minimum account balance required to keep a position open.
Maintenance margin is a threshold for account balance, while variation margin deals with daily profit and loss adjustments.
Common misunderstandings
What to do if this term applies to you
If you are involved in trading futures or options, it's important to understand how variation margin works to manage your financial risk. Consider using US Legal Forms to access templates for agreements or documents related to your trading activities. If your situation is complex or you have specific legal concerns, consulting a legal professional is advisable.
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