When is a variation margin approved ?

Sometimes referred to as a market-to-market margin, the variation margin engages in additional deposits of assets when market instability demonstrates a higher level of volatility. Variation margins are submitted to the clearinghouse handled the dealings by the clearing member. The payment of a variation margin may take place on a daily basis or a less frequent but steady schedule, based on the level of volatility connected with the investment.

Normally, a variation margin is not required when the primary assets associated with a given option are considered firm. However, if there is a observation that some nature of adverse movement concerning the asset is about to take place, the clearinghouse handling the option transactions may need some additional security or collateral in order to write the order. A cash flow from the clearing member to the clearinghouse will be remained in an account set up for the clearing member and only used if the perceived unfavorable conditions prove to be real and appear to be enduring in nature.

Tracking the market value of a given option is vital to determining whether a variation margin is compulsory. Often, the clearinghouse will base the determination on the change in performance from one trading stage to the next, or one calendar day to the next. It is not likely for a variation margin to be invoked if the stock drops a few points. However, if the stock continues to drop over several days, the clearinghouse may need to ask for a variation margin.

Along with observing actual stock performance, the clearinghouse will also watch for any news of unpleasant conditions going on with the issuing company. For example, word that a hostile takeover is about to take place will likely discourage the worth of the stock until the matter is resolved. Upon learning that a takeover attempt is in growth, the clearinghouse may need a variation margin until the takeover either took place or defeated. At that point, the act will be reviewed and a determination made if the margin is still necessary, or if variation may be lifted.

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