Knowledge

Initial margin (IM)

Deposits made by holders of contracts in proportion to their open positions that act as buffers against potential losses imposed on their counterparties.

Initial Margin originates from the need for a Clearing House to protect itself from the bankruptcy (or default) of a direct member. For Exchange Traded Products the calculation method is often Standard Portfolio ANalysis (SPAN) originated from CME. Now that OTC products are cleared, the Value at Risk (VaR) method is often used which can also be applied to Exchange Products too if needed.