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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A CCP calculates variation margin and initial margin for a clearing member. Which statement correctly distinguishes the two?

Initial margin is a buffer against potential future losses during the close-out period after a member defaults, whereas variation margin transfers current mark-to-market gains and losses daily. Variation margin keeps current exposure near zero; initial margin protects against movements before positions can be closed out.

  1. AInitial margin covers potential future losses during the close-out period after a member default, while variation margin passes current mark-to-market gains and lossesCorrect
  2. BVariation margin is held against potential future exposure, while initial margin is paid daily to settle current gains
  3. CBoth are returned to the member immediately after each trade settles
  4. DInitial margin is mutualised across all members, while variation margin is segregated

Explanation

Initial margin is a buffer sized to cover potential price moves over the margin period of risk after a default. Variation margin settles realised mark-to-market changes and resets current exposure to roughly zero. Mutualised resources belong to the default fund, not initial margin.

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