# Understanding Variation Margin: Definition, Calculation, and Examples

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## What Is Variation Margin?

The variation [margin](https://www.investopedia.com/terms/m/margin.asp) is a variable payment made to a [clearing house](https://www.investopedia.com/terms/c/clearinghouse.asp) when a [clearing member's](https://www.investopedia.com/terms/c/clearing.asp) collateral loses value. Variation margin is paid by clearing members on a daily or intraday basis to reduce the exposure of carrying high-risk positions.

If a merchant's collateral loses value due to price fluctuations, the clearing house charges a variation margin to make up the difference. This allows clearing houses to maintain a suitable level of risk, ensuring orderly payment for all traders using that clearing house. If a clearing member fails to make a variation payment, their account will be debited for the difference.

### Key Takeaways

*   Variation margin is a payment to a clearinghouse when collateral loses value.  
    
*   It ensures adequate margin levels and limits trading risk.  
    
*   Variation margin is often triggered by price changes, asset types, and market conditions.  
    
*   A margin call requires investors to add funds when account balances fall below required levels.  
    
*   Variation margin calculations depend on initial margin, maintenance margin, and current asset value.

## How Variation Margin Works in Trading

Variation margin brings account capital up to the required margin level. This margin, and the associated initial and [maintenance margin](https://www.investopedia.com/terms/m/maintenancemargin.asp), must be sustained by liquid funds allowing it to function as [collateral](https://www.investopedia.com/terms/c/collateral.asp) against any losses that may result from trades underway. 

For example, if a trader buys one futures contract, the [initial margin](https://www.investopedia.com/terms/i/initialmargin.asp) on that contract may be $3,000. This is the amount of capital they need to have in their account to take the trade. The maintenance margin may be $2,500. If the account drops below $2,500, the trader must add funds to bring it back to $3,000. The amount needed to bring the account to an acceptable level in order to ensure future trades is known as variation margin.

Imagine a broker with thousands of traders, each in different positions, making and losing money. The broker, or clearing member, must take all these positions into account, and then submit funds to the clearing houses which covers the risk taken by all their trades.

The amount of variation margin varies depending on the exact market conditions and price movement experienced over the course of the day. The variation margin payment of additional funds may be deemed necessary by a broker when the equity account balance falls below the maintenance margin or initial margin requirement. This request for additional funds is called a [margin call](https://www.investopedia.com/terms/m/margincall.asp).

## What Triggers a Margin Call and How to Manage It

A margin call is when a broker asks an investor to add funds to meet minimum margin requirements. If the investor is not able to meet the margin call, the brokerage can then sell the securities in the account until the amount is met or risk is reduced to an acceptable level.

> **Important**
>
> Variation margin is used in both derivatives and futures trades.

## Understanding Maintenance Margin Requirements in Trading

Maintenance margin is crucial when calculating variation margin. It refers to the amount of money an investor must keep in their [margin account](https://www.investopedia.com/terms/m/marginaccount.asp) when trading stocks. It is generally less than the initial margin required to make trades. This allows the investor to borrow from a brokerage. This margin functions as collateral against the amount borrowed by the investor.

The [Financial Industry Regulatory Authority (FINRA)](https://www.investopedia.com/terms/f/finra.asp) requires the maintenance margin to be set at a minimum of 25% for stocks. Other brokerages can set higher minimums, such as 50%, depending on the level of risk and the investor involved.

 In futures trading, maintenance margin has a different meaning. It's the level where an investor must top up their account to the initial margin.

## Example: How Variation Margin Adjustments Work

Let's say a trader buys 100 shares of stock ABC for $10 each. The initial margin set by the broker for purchase is 50%. This means that the broker must have $500 in his account at all times to make trades. Also assume that the maintenance margin is $300.

If the price of ABC falls to $7, then the $300 in losses in the trade are deducted from the initial margin account. This means that initial margin account balance is now $200, which is below the $300 maintenance margin amount specified earlier. The new initial margin amount is $350 (50% of $700). The trader would need to top up their account with $150 in order to continue trading.

## What Is Initial Margin and Variation Margin?

[Initial margin](https://www.investopedia.com/terms/i/initialmargin.asp) and variable margin are different types of collateral that are used to protect counterparties in a derivatives contract. Initial margin is the minimum amount of collateral, which must be paid before a contract can begin. Variation margin is a periodic payment between one side of the trade to the other to account for changes in the market value of the underlying asset of a derivative or futures contract.

## What Does a Clearinghouse Do?

A clearinghouse is an intermediary that finalizes transactions between a buyer and seller in the financial markets. Clearinghouses finalize trades, collect margin payments, and regulate the delivery of assets to their new owners after a trade is concluded.

## How Is Variation Margin Calculated?

The exact formula for variation margin will vary for each contract, depending on the underlying asset. In general, the formula for variation margin is:

Variation Margin = Initial Margin – Margin balance

The exact value of the variation margin will depend on the initial margin requirements, the maintenance margin requirements, and the current value of the underlying security.

## The Bottom Line

Variation margin is one of two forms of collateral that are used to reduce the risk of margin trading. Futures traders must deposit collateral with their clearing house as a condition for leveraged trading. When the value of the collateral goes down, the trader must deposit additional funds to make up the difference.

Variation margin is determined by the initial margin, the maintenance margin, and asset values. Taken together, these types of margin payments help ensure accountability and market integrity.  

> **Article Sources**
>
> 1.  SoFi. "[What Are Variation Margins? How Do They Work?](https://www.sofi.com/learn/content/what-are-variation-margins/)"