Initial Margin
Initial margin is the cash or eligible collateral a trader must deposit with the broker and the clearing house to open a futures position. It is a performance bond, not a purchase price, calibrated to cover a worst-case daily price move with high statistical confidence. ASX Clear (Futures) sets initial margins using a SPAN-style model targeting the larger of three standard deviations of the 60-day and 252-day historical price distribution, which under normal market conditions covers roughly 99.7 per cent of expected daily moves.
Why it matters
When you open a futures position you are not buying the underlying. You are signing a future delivery promise enforced by the clearing house. Initial margin is the security deposit that backs that promise. The clearing house holds it during the life of the trade and returns it when the position is closed out, minus any losses already settled through variation margin. Because the deposit is a small fraction of the notional exposure, futures generate leverage of roughly $10$ to $20$ times, which amplifies both gains and losses.
Formulas
Worked examples
A trader goes long one ASX SPI 200 futures at 7,500 with multiplier A$25. ASX Clear (Futures) requires initial margin of A$12,000 per contract.
Notional A$187,500. Margin rate . Leverage times. A $1\%$ index move equals about A$1,875, or roughly $15.6\%$ of the posted margin.
Five CME WTI crude oil futures contracts at per barrel, contract size 1,000 barrels. CME initial margin is approximately US$6,000 per contract during normal volatility.
Total notional US$375,000. Total initial margin US$30,000. Implied leverage times. A US$3 move in oil generates US$15,000 of variation margin, or half the posted initial deposit.
Common mistakes
- ✗Initial margin is the cost of the contract. It is a refundable performance bond, returned at close-out subject to losses settled along the way. The cost of a futures position is the realised mark-to-market sum, not the deposit.
- ✗Initial margin equals maximum loss. Losses can far exceed initial margin if the price moves through several days without the trader meeting margin calls. The 2018 Nasdaq Clearing default illustrates how trapped positions can blow through SPAN-calibrated buffers in tail events.
- ✗Margin is set by the broker. Brokers may require more than the clearing house minimum, but the clearing house sets the base figure through risk-based models such as SPAN. Retail brokers usually overlay an additional buffer for client default risk.
Revision bullets
- •Refundable performance bond posted with the clearing house
- •Set by SPAN or similar risk-based model on the exchange
- •Typically $5\%$ to $15\%$ of contract notional
- •Creates leverage of roughly $10$ to $20$ times notional
- •Distinct from variation margin (daily P&L) and maintenance margin (top-up trigger)
Quick check
Initial margin is best described as:
One ASX SPI 200 futures has notional A$180,000 and initial margin A$10,800. Implied leverage is approximately:
Connected topics
In learning paths
Sources
- Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.Standard textbook treatment of initial margin, maintenance margin, and variation margin mechanics.
- Australian Securities Exchange. ASX Clear (Futures) Margins and Risk Management. ASX, 2024.Authoritative description of how ASX Clear (Futures) sets initial margin using a SPAN variant calibrated to historical price distributions.
- Reserve Bank of Australia. 2021/22 Assessment of ASX Clearing and Settlement Facilities, Standard 6: Margin. RBA, 2022.Regulator-side review of ASX Clear (Futures) margining methodology with the 99.7 per cent confidence level explicitly stated.
- CME Group. Standard Portfolio Analysis of Risk (SPAN) Methodology. CME Group, 2024.Technical description of the global benchmark methodology for futures initial margin that ASX Clear (Futures) adapted.