Variation margin

The payment that follows a mark to market. On a cleared market, open positions are revalued at the settlement price on a fixed cycle, usually daily and sometimes intraday when prices have moved far enough, and the side showing a loss over that interval pays it to the clearing house, which passes it to the side showing a gain. That is what separates it from initial margin: initial margin is collateral held against a loss that has not happened yet, while variation margin settles a loss that already has.

The amount is arithmetic rather than judgement. It is the change in the marked price multiplied by the contract size and by the number of contracts, summed and netted across the positions in the same account, so a gain on one contract offsets a loss on another before anything is called. A call that is not met is not left outstanding: the clearing member closes the position, which is why the cycle is described as settling to market rather than as extending credit.

A retail contract for difference works to the same economics by a different route, and this is where readers are most often caught out. There is no separate daily call, because the unrealised figure is marked continuously into the account's equity, so the loss is reflected as it happens and the consequence appears through the margin level and the close out rules instead of as a demand for cash. Losses on such a contract are calculated on the full contract value and are not limited to the amount deposited. One point is genuinely unsettled among practitioners and their lawyers: whether variation margin is best treated as a settlement payment that extinguishes the day's obligation, or as collateral transferred and returnable, a distinction with real consequences for how cleared contracts are discounted and for what happens to it in a default.