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© Brightstone, Inc Read More About Futures: Clearing houses charge 2 types of margins - the Initial Margin and the Mark-To-Market margin (also referred to as Variation Margin). The Initial Margin is the sum of money (or collateral) to be deposited by a firm to the clearing corporation to cover possible future loss in the positions (the set of positions held is also called the portfolio) held by a firm. In the Morgage Quote simplest case, this is the dollar figure that answers a question of this nature: What is the likely loss that this firm may incur on its portfolio with a 99% confidence and over a period of 2 days? The clause 'with a 99% confidence' and 'over a period 2 days' mortgage refinance is to be interpreted as that number such that the actual portfolio loss over 2 days is expected to exceed the number only 1% of the time. Several popular methods are used to compute world savings bank initial margins. They include the CME-owned SPAN (a grid simulation method used by the CME and about 70 other exchanges), STANS (a Monte Carlo simulation based methodology used by the OCC), TIMS bank mortgage (earlier used by the OCC, and still being used by a few other exchanges like the Bursa Malaysia. The Mark-to-Market Margin (MTM margin) on the other hand is the margin collected to offset losses (if any) that has already been incurred on the positions held by a firm. This is computed as the difference between the cost of the position held and the current market value of that position. If the resulting amount is a loss, the amount is collected from the firm; else, the amount may be returned to the firm (the case with most clearing houses) or kept in reserve depending on local practice. In either case, the positions are 'marked-to-market' by setting their new cost to the market value used in computing this difference. The positions held by the clients of the exchange are marked-to-market daily and the MTM difference computation for the next day would use the new cost figure in its calculation. Clients hold a margin account with the exchange, and every day the swings in the value of their positions is added to or deducted from their margin account. If the margin account gets too low, they have to replenish it. In this way it is highly unlikely that the client will not be able to fulfill his obligations arising from the contracts. As the clearing house is the counterparty to all their trades, they only have to have one margin account. This is in contrast with OTC derivatives, where issues such as margin accounts have to be negotiated with all counterparties. |