Initial margin

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The Jolly Contrarian’s Glossary
The snippy guide to financial services lingo.™

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.
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Also known, to ISDAphiles, ninjas and the men and women of ISDA’s crack drafting squad™ as “Independent Amount” and to aggressive predictive text engines as “I’m”, initial margin is the amount of collateral a broker requires from its counterparty up front, notwithstanding any change in the mark-to-market value of the transaction. So initial margin is a precaution against potential future indebtedness, should it happen, not current indebtedness. Current indebtedness is covered by variation margin.

Therefore, where surrendered in cash directly to the lender/counterparty — i.e., not by way of client money or anything like that[1]initial margin creates negative indebtedness. In other words, the holder of initial margin is indebted to the provider of it. A counter-intuitive result to be sure; and part of the reason that, generally, regulatory initial margin is required to be posted in the form of securities or other custodial assets, and to a third party custodian, to whom (in theory) neither party has any credit exposure.

Stock lending

Another example of this counter-intuitive effect is in the stock loan market, where the haircut on the collateral leg is effectively initial margin, and since the Borrower title-transfers (say) 105% of the value of the 2010 GMSLA to the Lender, in fact the Lender is indebted to the Borrower and not the other way around. Hence the Pledge GMSLA of 2018, to solve this exact problem for bank counterparties’ LRD calculations.

Compare and contrast

Compare, by way of contrast, variation margin.

See also


  1. Though there it creates indebtedness from the bank that holds the cash, of course.