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An introduction to risk management

3.3 The margin system

When a futures position is opened an initial margin is placed on deposit in
a margin account to act as a security against possible default.

Also, an amount is set ('the maintenance margin') as the minimum
amount that the client must keep in the margin account.

At the end of each day, the profit or loss on the futures position is
calculated. This is known as ‘marking to market’. The daily profit or loss is
added to or subtracted from the margin account

If this causes the amount in the margin account to fall below the specified
maintenance margin, a 'margin call' is made to the investor, requiring the

investor to deposit extra funds (the 'variation margin') to top-up the margin
account.

Failure to pay the variation margin causes default and the contract is
closed.

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