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 performance bond and original margin. Initial margin, in this context, means 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.
Initial margin refer also to such assets that are deposited with a broker for the purpose of margin trading. Margin transactions involve a broker extending credit (broker’s loan) to a customer with a margin account. The initial margin is set by a regulatory authority. For example, it may constitute 50% of the purchase price for eligible securities (e.g., stocks, convertible bonds, etc.) or 50% of the proceeds of a short sale proceeds.
Initial margin is an up-front payment (expressed as a percentage of the trade price), that is made prior to any engagement in margin trading. After the initial margin is provided, a market participant is always required to meet another type of margin known as a maintenance margin (representing the amount of equity required to retain an open position in the market.
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