Variation margin (VM) is the additional funds is required to top off the balance in a margin account to the initial margin following a margin call. If those funds are not provided by the account holder, the broker will close out the position. Variation margin represents the collateral that is posted to protect a party to non-centrally cleared derivatives from a current exposure that has already been incurred by the other counterparty (or counterparties) from changes in the mark-to-market value of the derivatives after the transaction has been executed.
The amount of variation margin reflects the size of such a current exposure, which can vary over time depending on the mark-to-market value of the derivatives at any point in time.
In derivatives markets, variation margin is one of two types of collateral required to protect a party to a derivative from any potential event of default by the other counterparty. It is meant to account for changes in the market value of a transaction or a number of transactions.
