Initial vs Variation margin

[Maxim Rastorguev]

Dear all, I can’t really get the idea why initial and variation margin are generally different? Let’s say market value of a share equals 100 , its 99% 1 day var equals 7. I am a broker and I set margin requirements for my client as 7 to be 99% sure I will not suffer a loss in the next day. Should this 7 be both initial and maintenance? Why initial is usually greater (let’s say 12)?

 

[Detective]

Would you be able to clarify more?

I think you are confusing terms. There is initial margin, maintenance margin, and variation margin. Did you mean to ask why is initial margin is greater than maintenance margin?

For example:

Say Initial Margin = $300
Maintenance Margin = $225

Say you are trading futures...and your margin balance drops to $200 (below the maintenance margin), so a margin call happens and you need to add $100 more to get to initial margin. This $100 is the variation margin.

This is just an example. The concept of variance margin also exists outside scope of margin call, as you can be receiving money for excess margin or gain.

Does that help?

 

[Maxim Rastorguev]

Well I don't think I confuse actually. You are right my q was about why maintenance is less than initial. But I thought it is just a matter of convenience. Theoretically a bank can charge initial which is exactly the same as maintenance but in this case any single cent of price movement against the client will immediately trigger a margin call. Not convenient for the client I think

 

[Sixcarbs]

I think it is a balance between being able to function as a business, and protect whoever is guaranteeing the losses.

IIRC- LTCM was not charged initial margins (I am not talking about listed products.) because of their reputation and track record.

 

[Maxim Rastorguev]

Yes always charge margin no matter who your client is, this is the lesson

 

[David Harper CFA FRM]

I don't know that i've ever seen it explicitly explained why maintenance margins are typically 70% to 80% of initial margins, but maybe the reason is just operational: if maintenance were 100% of initial, then you only need a price drop (assuming a long position) in the first day to immediately trigger a margin call. There would be a roughly 50% probability of an immediate margin call! So maybe (initial - maintenance) is just an "operational buffer" to save the trouble of an immediate/quick margin call ...

 

[Maxim Rastorguev]

Totally agree with you David. Have eventually the same thoughts.