FRM Exam Part II · Margin (Collateral) and Settlement

Variation Margin, Margin Period of Risk and Remargining

Updated 11 October 2026 · Fact-checked

Variation margin is collateral exchanged to cover current mark-to-market exposure. The margin period of risk (MPOR) is the time between the last margin call you received and the close-out and replacement of the position after a default. Collateralized exposure is the uncollateralized exposure over the MPOR, so it is not zero.

Understand Variation Margin, Margin Period of Risk and Remargining

Variation margin (VM) moves the mark-to-market value of a derivative portfolio from one party to the other. If the portfolio is worth ₹10 crore to you, your counterparty posts about that amount. Done every day, this removes most of the credit exposure.

But it never removes all of it. A margin call is not instant. Value is measured at a valuation date. The call is sent, may be disputed, and collateral then takes time to settle. If the counterparty stops paying, you still need to close out and replace the trades. During all of this the portfolio value keeps moving.

The margin period of risk is the window in which you are exposed to those moves without fresh collateral. It runs from the last point at which the defaulter delivered collateral (or the last valuation that was fully covered) to the point at which the position is closed out and the market risk is hedged or replaced. Exposure after collateral is roughly the change in portfolio value over the MPOR, above any threshold and minimum transfer amount (MTA).

The MPOR has several parts: the remargining (call) frequency, the time to value and issue a call, the time for the counterparty to respond and settle, any dispute time, and the close-out and replacement time. Longer MPOR means more residual exposure. Under Basel rules, the minimum MPOR is 10 business days for non-centrally cleared derivatives with daily remargining, and it is increased for larger or illiquid portfolios, or after margin disputes. Remember that the 10 days is a regulatory floor, not an estimate of how long close-out really takes.

Under a simple model with normal changes in value, the volatility of the portfolio over the MPOR scales with the square root of time. So residual exposure grows with √MPOR, not linearly. Thresholds, MTAs and independent amounts shift the result up or down.

Key formulas to remember

Variation margin call: Call = max(0, V − Collateral held − Threshold), subject to the MTA and rounding; V is the net portfolio value to the caller. The call is made only if it exceeds the MTA.
Collateralized exposure at default: Exposure ≈ max(V(t + MPOR) − C, 0); C is collateral held at the start of the MPOR. Collateral is not updated during the MPOR.
Volatility over the MPOR: σ(MPOR) = σ(daily) × √(MPOR in days); Assumes independent, identically distributed daily changes. Use business days consistently.
Approximate residual exposure (normal model): Residual exposure at confidence c ≈ z(c) × σ(daily) × √MPOR + Threshold; Applies when the portfolio is fully covered up to the threshold. Add MTA effects if relevant.
Components of MPOR: MPOR ≈ remargining period + call, dispute and settlement time + close-out and replacement time; Use this to explain changes in MPOR. The Basel floor is 10 business days for daily-margined OTC netting sets.
Scaling between MPORs: Exposure(new) ≈ Exposure(old) × √(MPOR new ÷ MPOR old); Fast comparison when only the MPOR changes.

How to solve Variation Margin, Margin Period of Risk and Remargining questions

Use this order for any question on variation margin, MPOR or remargining. It keeps the risk measure, method and interpretation separate.

1Identify what is asked: the margin call, the MPOR, the residual exposure, or the effect of a change in frequency or dispute time.
2Write the net portfolio value and collateral held. For a call, apply threshold, MTA and rounding in that order.
3Build the MPOR from its parts: remargining interval, call and settlement lags, dispute time, close-out time. Check against the regulatory floor (10 business days for daily-margined OTC netting sets).
4Convert volatility to the MPOR horizon using σ × √MPOR. Keep the unit (days, business days) the same throughout.
5Compute the exposure: z × σ × √MPOR, then add threshold or MTA effects where the question gives them.
6Compare scenarios by scaling with √ of the MPOR ratio, not the plain ratio.
7State the interpretation: the exposure is residual, it is not zero, and it rises with longer MPOR, higher volatility, thresholds and illiquid or disputed portfolios.

Quickest way: Square-root scaling shortcut

When to use it: Use when a question gives one exposure or volatility figure and changes the MPOR or remargining frequency.

Find the ratio of new MPOR to old MPOR.
Take the square root of that ratio.
Multiply the old exposure or volatility by it.
Add any threshold, since it does not scale with time.
Check the option set: a 4× longer MPOR gives 2× exposure, not 4×.

Common mistakes in Variation Margin, Margin Period of Risk and Remargining

Assuming daily margining means zero exposure.
Students focus on the call and forget the delay between valuation, settlement and close-out.
Fix: Always think of residual exposure over the MPOR. Collateral is fixed while the portfolio keeps moving.
Scaling exposure linearly with the MPOR.
It feels natural to double the exposure for double the time.
Fix: Use √time for volatility under the standard model. Doubling MPOR multiplies exposure by about 1.41.
Treating the MPOR as the remargining frequency only.
Frequency is the most visible term in the CSA.
Fix: Add call, dispute, settlement and close-out time. Remargining frequency is just one component.
Letting the threshold scale with √time or cancel out.
Students apply the scaling factor to the whole expression.
Fix: A threshold is a fixed uncollateralized amount. Add it after scaling the volatility term.
Ignoring the MTA when computing the call.
The MTA looks like a minor detail.
Fix: If the required call is below the MTA, no transfer occurs. Check this before stating the call amount.
Treating the Basel 10-day MPOR as always applicable.
It is memorized as one number.
Fix: It is a floor for daily-margined non-cleared OTC netting sets. It is raised for large, illiquid or disputed portfolios.

Worked examples

Example 1

A bank has a net OTC portfolio with a counterparty worth USD 20 million to the bank. The CSA has zero threshold, a USD 500,000 MTA and daily variation margin. The bank already holds USD 18.2 million in collateral. How much collateral does it call?

Show the solution

Required collateral = V − threshold = 20 − 0 = USD 20 million.
Shortfall = 20 − 18.2 = USD 1.8 million.
Compare with the MTA: 1.8 million is greater than 0.5 million, so the call is valid.
The bank calls the full shortfall of USD 1.8 million.

Answer: USD 1.8 million.

Example 2

A portfolio has daily value volatility of USD 2 million. Assume normal changes, zero threshold and no MTA. Use z = 1.645 (95% one-sided). Estimate the residual exposure with an MPOR of 10 business days, and then if the MPOR rises to 20 business days after margin disputes.

Show the solution

σ over 10 days = 2 × √10 = 2 × 3.1623 = USD 6.325 million.
Exposure at 95% = 1.645 × 6.325 = USD 10.40 million.
σ over 20 days = 2 × √20 = 2 × 4.4721 = USD 8.944 million.
Exposure at 95% = 1.645 × 8.944 = USD 14.71 million.
Check by scaling: √(20 ÷ 10) = 1.4142, and 10.40 × 1.4142 = 14.71.

Answer: About USD 10.40 million with a 10-day MPOR and about USD 14.71 million with a 20-day MPOR. Doubling the MPOR raises exposure by about 41%, not 100%.

Exam tips

Read the MPOR components in the stem. Dispute time and close-out time are often added to the remargining interval.
If a question changes the MPOR, reach for square-root scaling first, then add any fixed threshold.
Name the concept precisely: variation margin covers current exposure, while the MPOR creates the residual exposure.
Remember the Basel floor of 10 business days for daily-margined non-cleared OTC netting sets, and that it increases in stress or for illiquid portfolios.
Check units. Mixing calendar and business days is a common trap in options.

Practice questions from Margin (Collateral) and Settlement

Variation Margin, Margin Period of Risk and Remargining in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Variation Margin, Margin Period of Risk and Remargining: frequently asked questions

What is the margin period of risk in simple terms?

It is the time between the last collateral you received from a defaulting counterparty and the point where you have closed out and replaced the trades. During this window the portfolio value can move against you with no new collateral.

Why does exposure remain even with daily variation margin?

Daily margin only updates collateral to the last valuation. Calls take time to issue, dispute and settle, and close-out takes more time. Value changes in that window create residual exposure.

How does remargining frequency affect credit exposure?

Less frequent remargining lengthens the MPOR and raises residual exposure. Under the usual model, exposure grows with the square root of the MPOR, so the effect is real but not linear.

What MPOR does Basel use?

For non-centrally cleared derivatives with daily remargining, the Basel minimum is 10 business days. It is longer for large or illiquid netting sets and where there have been repeated margin disputes.