This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Variation margin is the daily mark-to-market profit or loss on a futures position, and the variation margin is paid or received at the end of each trading day. The variation margin is not the same as the initial margin, and the variation margin is the daily settlement of the futures position. The trader who cannot meet a variation margin call faces a forced liquidation, and the trader should understand the consequences before opening a futures position.
What variation margin is
Variation margin is the daily cash flow on a futures position. At the end of each trading day, the exchange marks the position to the settlement price, and the exchange calculates the profit or loss on the position. The profit is credited to the trader's account, and the loss is debited from the trader's account. The daily cash flow is the variation margin.
The variation margin is unique to futures, and the variation margin is not used in CFD or stock margin trading. The variation margin produces the daily cash flow on the futures position, and the variation margin can be a credit or a debit depending on the direction of the move.
What happens if you don't meet the call
The first consequence is the margin call. The broker or the exchange issues a margin call, and the trader must deposit the variation margin within a short time, typically by the next morning. The time window depends on the broker and the exchange, and the time window can be a few hours to one business day.
The second consequence is the forced liquidation. The trader who does not deposit the variation margin has the position liquidated by the broker, and the liquidation happens at the next available price. The forced liquidation can happen at the worst possible time, and the trader realizes the loss.
The third consequence is the additional costs. The forced liquidation can trigger additional fees, and the additional fees include the broker's liquidation fee, the exchange's clearing fee, and the slippage. The additional costs add to the loss, and the additional costs can be significant.
The fourth consequence is the negative balance. The trader who does not have enough equity to cover the variation margin may end up with a negative account balance, and the broker can demand additional funds. The negative balance is rare, and the negative balance is more common on highly leveraged positions.
How to prepare for a variation margin call
The first preparation is to keep a cash buffer. The trader should keep 6 to 12 months of variation margin payments in cash, and the cash should be in a separate account. The buffer protects the trader from a margin call during a temporary market downturn, and the buffer gives the trader time to top up the account.
The second preparation is to monitor the position. The trader should check the position daily, and the trader should set up alerts for the price levels that would trigger a significant variation margin. The monitoring helps the trader react quickly, and the monitoring helps the trader top up the account before the call.
The third preparation is to size the position to the cash flow. The trader should choose a position size that the trader can service with the cash flow from the portfolio or from the salary. The position should not be sized to the maximum the broker allows, and the position should be sized to a level the trader can service even in a downturn.
The fourth preparation is to have a backup plan. The trader should have a plan for topping up the account, and the backup plan should include a line of credit, a savings account, or a second brokerage. The backup plan is a safety net, and the backup plan is a way to avoid the forced liquidation.
How to avoid the variation margin call
The first avoidance is to use a stop-loss. The stop-loss limits the loss, and the stop-loss prevents the position from accumulating a large loss that triggers the variation margin call. The stop-loss should be placed at a level the trader is comfortable with, and the stop-loss should not be moved against the trader.
The second avoidance is to reduce the position size. The trader who cannot meet a potential variation margin call should reduce the position size, and the reduction should bring the position to a level the trader can service. The reduction is a temporary measure, and the reduction can be reversed when the trader's cash flow improves.
The third avoidance is to close the position before the close. The trader who expects a large adverse move can close the position before the close, and the closure prevents the variation margin from being applied. The closure is a way to avoid the call, and the closure is a way to lock in the loss at a known price.
Common questions about variation margin
What is the typical variation margin payment? The variation margin payment is the daily mark-to-market on the position. The payment can be a credit or a debit, and the payment depends on the direction of the move. The trader should check the broker's margin policy, and the trader should be prepared for the payment to be a debit.
How quickly must I meet the variation margin call? The time window depends on the broker and the exchange. The time window can be a few hours to one business day, and the time window is usually shorter for retail clients than for institutional clients.
Can the broker extend the time window? Some brokers may extend the time window on a case-by-case basis, and the broker may extend the window for clients with a long relationship. The extension is rare, and the trader should not rely on the extension.
Related resources
Where to start
If you are evaluating variation margin, the most useful first step is to calculate the maximum daily loss on a representative futures position, and to keep a cash buffer that covers the loss. Our broker comparison lists the futures brokers and the margin policies, which together tell you what the broker offers before you open the first futures position.