A How-To Guide: Margin Best Practices

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The 4 key questions you need to answer before posting margin in 2021.

Trading derivatives means paying margin. Whilst normally this creates no issues, COVID-19 has shown how quickly initial and variation margin requirements can spike with market volatility, threatening liquidity as firms are forced to post tens of millions in additional cash.

With so much capital at stake, it’s critical that firms start actively managing their margin.

We break down the 4 key questions you need to ask to gain total visibility and control over your margin.

1. Are we being called for the right amount of margin?

In times of stress, processes used to call margin are often at breaking point – meaning frequent errors. Move beyond basic position reconciliation to validate inputs, such as Open Trade Equity and Variation Margin, as well as your outputs to ensure you are not over-posting.

2. What is driving daily margin changes?

In volatile markets, managers need to understand which PM or position is driving the consumption of capital. We delve into the drivers of margin and explore all of the areas that can impact your requirements.

3. How can we optimise the amount of margin we are called for?

Reducing margin requirements, without changing trading, is an easy way to increase return on capital. Splitting positions through brokers to minimise the liquidity risk component of margin calculated and other changes in behaviour can save you up to 50% on total margin.  

4. How much of a cash buffer do we need to maintain?

If there were to be another market shock, do you have the cash available to cover that call? Learn how to effectively forecast initial and variation margin, lowering the cost of Margin Financing and ensuring efficient liquidity management.

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