Margin call

What a creditor does to a debtor under a margin lending arrangement, if the value of the loaned assets drops in value.

I lent you 70 against an asset worth 100, on the condition that the asset would be worth 30 more than my loan.

The Asset has fallen in value to 90.

I therefore call you for 10 of margin.

Here a “margin lending arrangement” could be a swap, future, stock loan or margin loan — any financial transaction where there one party invests in an asset on terms on which the other party (effectively) finances it.

Initial margin and variation margin

Margin comes in two forms.

• Variation margin, or VM, is collateral against the present mark-to-market value of the transaction exposure.
  • If you don’t have this and the counterparty goes bust, you’re whistling.
  • In many kinds of margin loan, VM will take the form of the asset in question itself.
• Initial margin, or IM, is additional collateral in excess of the present mark-to-market value of the transaction exposure.
  • This guards against sudden adverse movements in the value of the collateral or the exposure between margin calls.
  • IM is calculated by reference to the expected maximum loss in value of the transaction (and the existing margin) over the margin period.

Legal forms

Popular ways of calling for margin include the Credit Support Annex to an ISDA,

See also

• [[[Credit Support Annex]]