An amount of cash that is deposited or collateral (eligible securities) that is posted with a clearing house to ensure a market participant’s performance on obligations to it. In this sense, it is also known as an initial margin and original margin. It represents funds, securities, or property posted by a party to a futures, option, or swap as a risk mitigation deposit to account for potential future exposures that may arise from changes in the market value of such a position.
In general, a performance bond is a surety (also, a surety bond) that is presented by one contracting party (an obliged party) to another (in the context of a contract or agreement, etc.) whereby the recipient party is protected to a certain extent from losses that may arise when the obliged party fails to fulfill the contractual terms. Such a surety bond can issued by a third-party surety company that will be held liable with the original, obliged party (the principal) for nonperformance or breach of contractual terms.
For example, a party to a swap agreement may request a performance bond from the other party against any failure to pay the obligations associated with its respective leg of the swap (e.g., floating rate payments).
