What is segregated initial margin?
What is Segregation? CFTC rules require a swap dealer or major swap participant to hold a counterparty’s initial margin for non-cleared swaps in an individual account, for and on behalf of the counterparty, and separate from margin posted by other customers if requested by such counterparty.
What is variation margin and initial margin?
In derivatives markets, initial margin is one of two types of collateral required to protect a party to a contract in the event of default by the other counterparty. Variation margin – the other type of collateral – is paid daily from one side of the trade to the other, to reflect the current market value of the trade.
How do you calculate variation margin?
The difference between the initial margin and the maintenance margin, i.e., $1,000, is the variation margin. Thus, the variation margin is the amount of funds required to ensure the account reaches a minimum level to ensure future trades.
What is variation margin in collateral?
In derivatives markets, variation margin is one of two types of collateral required to protect parties to a contract in the event of default by the other counterparty. It provides for changes in the market value of the trade or a portfolio of trades.
What is segregated collateral?
Collateral segregation helps to expedite return of assets upon a counterparty’s default. Post and maintain securities in segregated collateral accounts. Segregate from one collateral provider account to multiple counterparties in a highly scalable manner.
What is the difference between cleared and non-cleared derivatives?
When an OTC derivative has been cleared, margin must also be posted to the CCP, and the clearing member is required to collect margin from its client. Non-cleared transactions are agreed bilaterally between a buyer and seller.
What is the purpose of variation margin?
Variation margin is used to bring the capital in an account up to the margin level. This margin, and the associated initial and maintenance margin, must be sustained by liquid funds allowing it to function as collateral against any losses that may result from trades underway.
Why variation margin is important?
Variation margin helps with the following things: VM ensures that the mark-to-market losses or the movements of the futures contracts are covered. This margin protects those involved in a contract if there is a default by any party. It also helps to compensate for the change in the market value of a trade.
How is initial margin calculated?
The total Initial margin requirement or credit for the product group is calculated by summing algebraically the total of the product group spread margin, the product group MTM margin, the product group premium margin and the total additional margin (or minimum margin) for the product group.
What are the 3 types of segregation?
Types
- Legal segregation.
- Social segregation.
- Gated communities.
- Voluntary segregation.
What is an example of segregation?
Segregation is the act of separating, especially when applied to separating people by race. An example of segregation is when African American and Caucasian children were made to attend different schools.
Are FX forwards centrally cleared?
FX Forwards and Swaps Exempted From Central Clearing Under Dodd-Frank. The US Treasury has decided to exempt FX forwards and swaps from mandatory clearing. In its final determination on the matter last week, it said existing procedures in the FX swaps and forwards market mitigate risk and help ensure stability.
Who clears OTC derivatives?
An OTC derivative trade is considered centrally cleared when it is cleared through a clearinghouse, instead of directly between two counterparties, and both counterparties effectively assume credit risk exposure to the clearinghouse.
Who pays variation margin?
Variation margin is a collateral payment made by one party to a counterparty to cover any change in value of underlying assets used in futures contracts. Traders may make these payments on a day-to-day or intraday basis as directed by the clearing house.
What is the purpose of initial margin?
Initial margin (IM) is collateral collected and/or posted to reduce future exposure to a given counterparty as a result of non-cleared derivative activity. Whilst there is a recognised process within exchange traded and cleared derivatives, this is largely a new process for non-centrally cleared OTC derivatives.
What is variation margin designed for?
Variation Margin reflects the daily change in market value of the contracts, i.e. the daily gain or loss of a contract due to market movements.
What is initial margin example?
Futures and initial margin
For example, if a crude oil futures contract is quoted at $100,000, a futures account holder can enter a long position by posting only $5,000 initial margin, or 5% of the contract value. In other words, this initial margin requirement would give the account holder a 20x leverage factor.
What is standard initial margin model?
The standard initial margin model (Simm) is a common methodology to help market participants calculate initial margin on non-cleared derivatives under the framework developed by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions.
What are two different types of segregation?
Segregation is made up of two dimensions: vertical segregation and horizontal segregation.
What are the 2 types of segregation?
How does FX clearing work?
Each futures exchange has its own clearing house. All members of an exchange are required to clear their trades through the clearing house at the end of each trading session and to deposit with the clearing house a sum of money sufficient to cover the member’s debit balance.
What is clearing in FX?
Clearing Definition.
After a trade has been matched by a trading system, it needs to be cleared and settled so that the seller gets paid and the buyer gets ownership of the security or currency traded. Clearing is comprised of all steps of the post-trade processes apart from the final payment and change in ownership.
How are OTC trades settled?
How is an OTC settled?
Almost all OTC derivatives transactions are executed by telephone. Once a trade is executed, it is confirmed and settled bilaterally by the counterparties. The primary purpose of issuing confirmations is to ensure that the counterparties agree on the economic terms of the trade.
Is initial margin refundable?
Initial margin is a returnable deposit based on your open positions and any possible margin offsets. While members may be required to provide additional margin to cover concentration risk, illiquid positions or wrong-way risk, we continually evaluate your portfolio to realize margin offsets.