Variation Margin ensures that profit and losses are up to date. Initial Margin is used to estimate potential losses following a default, in the period between the last margin collection and the close out of the position. This will be calculated based on:

  • An assumed Holding Period
  • Likely price movements under normal market conditions
  • To an assumed Confidence Level

Initial Margin algorithms also cover some additional risks, such as Liqudity or Model risk. Initial Margin is calculated based on algorithms designed by the CCPs, for example SPAN.