Margin | Practical Law

Margin | Practical Law

Margin

Margin

Practical Law Glossary Item 2-382-9864 (Approx. 4 pages)

Glossary

Margin

This term has multiple meanings. In the context of:
  • Derivatives and trading. Collateral, typically in the form of cash or securities, that is posted by a party to cover its exposure to its counterparty under the transaction. Financial institutions and certain other counterparties generally require that their trading counterparties and prime brokerage customers post margin to protect against the risk that the counterparty may be unable to pay or settle their out-of-the-money trades when required to do so. A counterparty is often required to post margin where it has borrowed cash from a financial counterparty to purchase securities or options, engaged in short selling of securities or options, or entered into certain types of derivatives contracts which may result in exposure of the financial party to its counterparty. Two types of margin collateral posting are common: initial margin (IM) and variation margin (VM) Margin collateral matters for uncleared OTC derivatives transactions are typically governed by an ISDA® credit support annex. Margin collateral matters for cleared derivatives transactions are determined by the rules of the applicable clearinghouse.
  • Lending. See applicable margin.