Initial Margin

Initial margin is collateral that a party to a derivatives or leveraged trade must post at the start of the position to cover losses that could arise if it defaults and the position has to be closed out. It is held by a clearing house, a broker or the other party to the trade, and is returned when the position ends. Initial margin is required on exchange-traded futures and options, on cleared and many uncleared over-the-counter contracts, and on securities bought with borrowed money.

Initial margin protects against future price moves; variation margin settles moves that have already happened, usually every day after positions are valued mark-to-market. A margin call is the demand for more collateral when either requirement rises or the account falls short. In the cleared markets the amount is set by the central counterparty, and in uncleared markets by rules agreed internationally by banking and securities regulators.

When you rent a flat, the landlord usually asks for a deposit before you move in. The deposit is not rent; it sits aside in case you leave suddenly and the landlord has to pay for repairs or find a new tenant. If everything goes well, you get it back at the end.

Initial margin works the same way. Before you are allowed to hold a position whose value can swing, the other side asks for a deposit large enough to cover the losses it might suffer while it closes out your position if you disappear. The riskier and more volatile the position, the bigger the deposit.

Margin models estimate how much a position could lose over the time it would take to liquidate it after a default, at a high level of confidence. A simplified version, based on value at risk, is:

• $V$ is the market value of the position.
• $\sigma$ is the daily volatility of its value, written as a decimal.
• $z$ is the number of standard deviations for the chosen confidence level, about 2.33 for 99%.
• $h$ is the margin period of risk in days, the time needed to close out the position.

For a position worth $10{,}000{,}000 with daily volatility of 1%, a 99% confidence level and a 10-day period, initial margin is $10{,}000{,}000 \times 0.01 \times 2.33 \times \sqrt{10} \approx 736{,}800$ dollars. Real models are more complex. Futures exchanges have long used scenario-based systems such as CME's SPAN, CCPs use value-at-risk or expected-shortfall models over historical stress periods, and dealers in uncleared swaps commonly use ISDA's Standard Initial Margin Model (SIMM). Collateral other than cash is usually accepted only after a haircut.

A CCP collects initial margin from each clearing member as the first line of defence in its default waterfall, ahead of the defaulter's contribution to the default fund and the CCP's own capital. International standards in the Principles for Financial Market Infrastructures, issued by CPMI and IOSCO in 2012, require margin to be risk-based and regularly tested. Under the European Union's EMIR rules, for example, a CCP's margin on OTC derivatives must cover price moves at a 99.5% confidence level over a liquidation period of at least five days. ISDA estimated that initial margin posted for cleared interest rate derivatives and credit default swaps at major CCPs reached about $423.5 billion at the end of 2025.

After the 2008 financial crisis, G20 leaders agreed in 2009 to push standard OTC derivatives into central clearing. For contracts that stay bilateral, the Basel Committee and IOSCO published a margin framework in 2013, which national regulators implemented through rules under the US Dodd-Frank Act, EMIR in Europe and similar laws elsewhere. Key features include:

• A phased start. Requirements began in September 2016 for the largest dealers and extended in six phases to firms with an average aggregate notional of €8 billion (or $8 billion in the US) or more from September 2022.
• A common calibration. Initial margin must cover a 99% one-tailed confidence level over a 10-day horizon.
• Gross exchange and segregation. Both parties post initial margin to each other, and it must be held so that it is protected if the collecting party fails, usually with a third-party custodian.
• A threshold. Firms may agree not to exchange initial margin until the amount owed exceeds €50 million or its equivalent.

For US share purchases on credit, the Federal Reserve's Regulation T sets initial margin at 50% of the purchase price, while brokers then apply lower maintenance requirements. On crypto exchanges offering perpetual futures, initial margin defines leverage: a 5% initial margin allows 20 times leverage. If losses use up the margin, the exchange triggers a forced liquidation rather than waiting for a top-up.

A common criticism is that margin models are procyclical. Volatility estimates rise in a crisis, so margin requirements jump just as liquidity is scarce, as happened in March 2020 and in European energy markets in 2022. Regulators now ask CCPs to use anti-procyclicality tools and to make their models more transparent.

• International Organization of Securities Commissions (IOSCO)
• US Commodity Futures Trading Commission