A derivative contract that entails periodic payments by the out-of-the-money counterparty (losing counterparty), usually on a daily basis. Payments correspond to the amounts by which the derivative is out of the money (OTM).

Under a settle-to-market (STM) approach, the variation margin (VM) transferred is treated and recorded as a legal settlement of the derivative contract but not as a transfer of collateral– i.e., the variation margin legally settles the outstanding exposure. However, it does not make any other change or reset of the contractual terms of the derivative.

For an STM interest rate swap, the payments for outstanding marked-to-market (MTM) of the swap will result in the MTM of the cleared swap position being reset to zero on a daily basis. The settlement does not create an entirely new contract and does not lead to the expiration or termination of the existing contract. Future settlements on the contract will continue to be made under the same terms of the existing contract. The elements of the cleared swap (swap tenor, notional, fixed-rate leg and floating-rate leg) are exactly the same as a bilateral OTC interest rate swap regardless of whether it is collateralized or not (collateralized swap).