Glossary · Operations
Margin
Margin is collateral a fund deposits with a broker, clearing house or counterparty to cover the credit risk of leveraged, short or derivative positions.
The word has several related uses. In securities margin lending, a prime broker lends against the fund’s long portfolio and charges interest on the debit balance. In futures and cleared derivatives, the clearing house requires initial margin when a position opens and settles variation margin daily as prices move. In OTC derivatives, margin is exchanged under a Credit Support Annex to an ISDA.
A margin call occurs when collateral falls below the required level; the fund must post more cash or eligible securities by a deadline, or the counterparty may liquidate positions. Treasury teams forecast margin needs so that calls do not force selling at poor prices.
In the books, initial margin posted is an asset (cash held at broker or restricted cash), not an expense. Variation margin on futures is realized cash that offsets the change in open trade equity. Margin interest and financing charges are accrued daily and reconciled to broker statements. A common error is double counting — recording both the variation margin cash and the unrealized gain on the same futures position.
Related terms
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