Variation Margin
The daily cash payment made between counterparties in a futures contract to settle the profit or loss arising from mark-to-market revaluation of open positions, ensuring that gains and losses are transferred in real time rather than accumulated until expiry.
Unlike a stock purchase where the buyer pays the full price on settlement day and receives ownership, a futures contract requires no upfront payment of notional value. Instead, the exchange uses a variation margin mechanism to settle the daily change in value of each open futures position. This mechanism, also known as daily mark-to-market (MTM) settlement, was central to how NSE's clearing corporation — NSCCL — managed counterparty credit risk.
At the end of each trading day, NSCCL computed the settlement price for each futures contract. The settlement price was typically the weighted average price of trades in the last 30 minutes of the session. Each open position was then revalued from its previous settlement price to the new settlement price. Positions that gained value received a credit to their margin account (the variation margin inflow), while positions that lost value had a debit charged (the variation margin outflow).
For example, if a trader held one long Nifty futures contract bought at 22,000 and the settlement price that evening was 21,800, the trader's margin account was debited Rs 10,000 (a fall of 200 points multiplied by the lot size of 50). If the settlement price the next day moved back to 22,100, the account received a credit of Rs 15,000 (300 points multiplied by 50). The running cost basis of the position was also reset to the settlement price after each MTM cycle.
Variation margin payments had to be met before the start of the next trading session. If a trader's margin account balance fell below the maintenance margin level after a variation margin debit, a margin call arose. Failure to top up the account could result in the broker squaring off the position.
For options, variation margin in the strict sense applied to short option positions via MTM of the premium. Long option holders did not face variation margin debits — they had already paid the premium in full. The distinction between variation margin (cash flow) and initial margin (capital block) was important for treasury management by institutional traders.