What is Variation Margin?

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Accepted Answer

Variation Margin (VM) is the daily cash flow exchanged between counterparties in a derivatives contract, typically centrally cleared, to cover the change in the contract's mark-to-market value, ensuring that the exposure of the winning party is fully collateralized and mitigating counterparty credit risk.

Variation Margin

What is Variation Margin?

What is the precise mechanism for calculating and settling Variation Margin in FX derivatives, and how does it differ from Initial Margin?

How does the daily exchange of Variation Margin serve as a critical risk management tool in centrally cleared FX markets, particularly in mitigating systemic risk?

Why did global regulatory reforms, such as the Dodd-Frank Act and EMIR, mandate the exchange of Variation Margin for non-centrally cleared derivatives, and what was the impact on the FX market?

When does a Variation Margin call occur, and what are the specific operational and liquidity challenges that financial institutions face in meeting large, sudden VM obligations?

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