Initial margin
Also written IM · Upfront margin
The deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
In plain language
The exchange guarantees that every derivatives trade settles. Before it will make that promise about you, it wants money on the table.
Initial margin is the amount you must have in your margin account at the time of entering into the contract — not afterwards, not on demand. It is collected upfront, and the position is not accepted without it.
Both sides pay it. A futures buyer and a futures seller each have an obligation to honour the contract, so each is a potential source of loss to the system, and each is charged. This is the point where futures and options diverge sharply: an option buyer has already paid the premium and has no further obligation, so no initial margin is collected from him. The option seller, who does have an obligation, does post it.
It is not a fee and not a payment. It is your money, held as collateral, and released when the position is closed.
How it works
The size is risk-based, not a flat percentage. The exchange charges more initial margin on more volatile underlyings, because the plausible one-day loss on them is larger.
The formal standard in Chapter 7 is that initial margin requirements are based on 99% value at risk over a one-day time horizon — enough to cover the loss on all but the worst one day in a hundred. Where it would not be possible to collect the mark-to-market settlement before the commencement of trading on the next day, the margin is computed over a two-day time horizon instead.
The actual number is produced by SPAN, the portfolio-based methodology the clearing corporation runs; the risk arrays and scenario logic belong to that entry, not this one. The collection chain is: the clearing corporation collects from the clearing member, the clearing member collects from the trading member, and the trading member collects from the client. Collateral may be cash or securities placed through the margin pledge mechanism.
Initial margin is not the only margin. At client level a premium margin is charged alongside it on option positions, and an assignment margin once an option is assigned. Intraday Crystallised Losses form part of the initial margin and are adjusted against the clearing member's liquid assets.
The formula
Contract value = Futures price × Lot size
Initial margin = Contract value × Margin rate set by the exchange
The margin rate is an output of SPAN, not a number you are given in advance. Exam questions state it.
A worked example
The workbook's own case. On 14 May 2024 an investor expects the market to rise and goes long one Nifty futures contract for the May expiry at 22,250. The lot size is 25.
Contract value = 22,250 × 25 = Rs 5,56,250
Assume the broker charges 10% of contract value as initial margin:
Initial margin = 10% × 5,56,250 = Rs 55,625
The seller on the other side of that trade deposits an initial margin too. Neither of them has paid the other anything.
What the Rs 55,625 actually buys. It is the buffer against one bad day, and it is worth seeing how thin it is:
| Move in Nifty on the day | Points | P&L on 25 units | As a % of the Rs 55,625 margin |
|---|---|---|---|
| +1% | +222.50 | +Rs 5,562 | +10.0% |
| −1% | −222.50 | −Rs 5,562 | −10.0% |
| −3% | −667.50 | −Rs 16,688 | −30.0% |
| −5% | −1,112.50 | −Rs 27,813 | −50.0% |
A 5% fall — an ordinary bad day in a bad week — consumes half the deposit. The mark-to-market process collects that loss in cash the next morning, and if it is not paid the position is liquidated. Initial margin is not the maximum you can lose on a futures position. It is only what you must put up to open it.
Why NISM asks about it
Chapter 3, section 3.3, introduces initial margin under "Margin Account" with exactly the Nifty example above, alongside mark-to-market. Chapter 7, section 7.6, gives the formal treatment — the 99% one-day value-at-risk standard, the two-day horizon exception, and the collection chain from clearing corporation to client. Expect a straight computation (contract value × margin rate), and expect the conceptual question "who pays initial margin?" — for futures, both parties; for options, the seller.
Common exam traps
- Both buyer and seller of a futures contract pay initial margin. Only one side of an option contract does — the writer.
- An option buyer pays no margin at all. He has already paid the premium and carries no obligation, so he poses no further risk to the system.
- Initial margin is not a cost. It is a refundable deposit. Brokerage, STT and exchange fees are costs; margin is not.
- Initial margin does not cap your loss. Futures losses are unlimited in principle; the margin is a one-day buffer, topped up daily by mark-to-market.
- Higher volatility means higher initial margin, not lower. The margin tracks the risk of the underlying.
- Initial margin, exposure margin, premium margin and assignment margin are different things collected for different reasons. Do not use the names interchangeably.
- The 99% figure is value at risk over one day — not 99% of the contract value, and not a 99% success rate.
Where this is taught
- Series XVI · Chapter 7: Clearing, Settlement and Risk Managementintroduced here
- Series XXI-B · Chapter 2: Introduction to Securities Marketsintroduced here
- Series XXI-A · Chapter 2: Introduction to Securities Marketsintroduced here
- Series X-A · Chapter 10: Understanding Derivativesintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series V-D · Chapter 15: Introduction to Forwards and Futuresintroduced here
- Series XXI-B · Chapter 5: Derivatives
- Series VIII · Chapter 7: Clearing, Settlement and Risk Management
Related terms
- Margin pledgeThe only permitted way for a client to give securities as margin — a special pledge created in the depository system that leaves the shares in the client's own demat account instead of transferring them to the broker.
- SPANThe scenario-based system clearing corporations use to compute initial margin — it revalues a client's whole derivatives portfolio under sixteen what-if scenarios and charges the worst loss.
- Futures contractA standardised forward traded on an exchange, where the exchange fixes every term except the price and the clearing corporation guarantees settlement, so neither side carries the other's default risk.
- LeverageControl of a large contract value for a small upfront outlay — premium for an option buyer, margin for a futures position — which multiplies percentage gains and percentage losses by the same factor.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- Exposure marginA derivatives-segment margin charged as a percentage of the notional value of an open position, on top of initial margin; on options it is collected only from sellers.
- Premium marginA margin charged at client level on option buyers equal to the premium they owe the clearing corporation, levied until the premium settlement pay-in is complete.
- Off-Balance Sheet ExposureExposure a fund takes through leverage and derivative contracts to assets that are not its direct obligation — only margin and premium show in the books, but the fund bears the full risk and return.
- Central counterpartyThe clearing corporation that interposes itself in every exchange trade, becoming buyer to every seller and seller to every buyer, so neither side carries the other's credit risk.
- Invoice priceThe cash a buyer pays the seller on physical delivery: the futures settlement price multiplied by the delivered bond's conversion factor, plus its accrued interest, scaled by the contract amount.
- Contract valuePrice or rate multiplied by the lot size or contract multiplier — the number margins, brokerage, transaction charges and regulatory fees are all computed from, and different for every contract.
- Systemic riskThe risk that one participant's default triggers defaults by others until the settlement system itself fails — the domino risk, not the market risk.
- Short Option Minimum MarginThe SPAN-computed margin charged to the writer of a commodity option, floored by SEBI-prescribed minimum volatility scan ranges so that a cheap option cannot be written on a trivial margin.
- Volatility Scan RangeThe percentage volatility movement SPAN applies when scanning a portfolio for its worst-case loss, floored by SEBI at levels that depend on the commodity type and its annualised volatility.
- Tender period marginAn extra margin charged at client level on all open positions once a contract enters its tender or delivery period — the higher of 20% of contract value, or 3% plus a five-day 99% VaR of spot prices.
- Daily Price LimitThe band around the previous close within which a contract may trade during a day — a circuit filter that caps volatility, imposes a cooling-off pause, and can halt the contract for the session.
- Devolvement marginA margin charged equally on buyers and sellers of Options on Futures over the last three days before expiry, so that ITM positions about to become futures already carry futures-level margin.
- Special marginAn extra margin an exchange levies on only one side of the open interest — buy or sell — to correct one-sided price momentum that threatens market integrity; SEBI's view is taken first.
- Additional marginAn extra exchange margin levied on both the buy and sell side of a commodity contract to cool an overheated market; separately, a margin a broker may impose on risky clients or trades.
- Concentration marginAn extra margin levied only on the clients whose buy- or sell-side open interest is concentrated relative to total open interest in a commodity or contract, rather than on the whole market.
- Lean period marginAn additional margin on agricultural commodity futures during the pre-harvest lean period, when uncertainty about crop size makes spot prices volatile; the periods and rates are set by exchange circular.
- Intra-commodity spreadA long futures position in one contract month and a short position in another month (or a different lot size) of the same commodity, taken to profit from a change in the gap between them.
- Inter-commodity spreadA long futures position in one commodity and a short position in a different but economically related commodity for the same month — such as guar seed against guar gum — to trade the gap between them.
- Exchange traded derivativeA derivative traded on an organised exchange on standardised terms, with prices set by anonymous auction and performance guaranteed by a clearing corporation — as against a bilateral, customised OTC contract.
- AssignmentThe allocation of exercised options to one or more option sellers — the moment the writer's obligation becomes a real cash outflow, decided by the exchange and not by the writer.
- Custodial participantA client allowed to trade through several trading members while clearing and settling through a single clearing member, identified by a unique CP code; its CM must confirm the trades.
- Price Scan RangeThe probable one-day price change used in SPAN margining — based on 6 standard deviations, subject to a minimum percentage of the underlying (1.50% for USDINR).
- Margin on consolidated crystallized obligationPart of initial margin that blocks a client's net payable from closed-out futures profit or loss and option premium intraday, and all settlement obligations at end of day, until settlement.
- Net Option ValueMarket value of a clearing member's long option positions minus its short option positions, added to (or subtracted from) its Liquid Net Worth so option gains and losses hit capital without cash settlement.
- Calendar spread chargeThe reduced margin on offsetting positions in the same underlying across different expiries: 1.75% of the far-month contract for index derivatives, 2.2% for single stock derivatives.
- Open positionAn outstanding, unsettled long (buy) or short (sell) position in a contract; margins, exposure limits, daily MTM and corporate-action adjustments are all applied to open positions.
- Cross marginingReduced margin on a client's positions in the cash and equity derivatives segments that offset each other, with only a spread margin of 25% to 40% of the normal margin charged.
- Margin Period of RiskThe time horizon, subject to a minimum of 2 days, that a clearing corporation must estimate for each equity derivatives product and use to scale up SPAN's 99% value-at-risk initial margin.
- Daily Settlement PriceThe price at which every open futures position is marked and reset at the end of each day — the last 30 minutes' volume weighted average price of that contract, computed separately for each expiry.
- Peak marginThe highest intraday margin requirement of a client, measured from at least four clearing corporation snapshots a day; brokers are penalised if collected margin falls short of it.
- Long positionAn outstanding, unsettled buy position in a derivatives contract — the buyer of a futures contract, or the buyer (holder) of an option, is said to be long.
- Trading cum clearing memberA clearing member who is also a trading member of the exchange, and may clear and settle its own trades, its clients' trades, and the trades of other trading members and custodial participants.
- J. R. Varma CommitteeThe SEBI group under Prof J. R. Varma, set up in June 1998, that worked out risk containment for India's derivatives market — margining methodology, membership net worth, deposits and real-time position monitoring.
- Cash componentThe part of a clearing member's collateral deposit held as cash, bank guarantees, fixed deposit receipts, T-bills or dated government securities — as opposed to the non-cash component.
- Non-cash componentThe part of a clearing member's collateral deposit held as approved demat securities and other non-cash forms — capped so it cannot exceed 50% of total liquid assets.
- Delivery marginsMargins levied on potential in-the-money long option positions and deliverable futures positions in the run-up to expiry, staggered from 20% four days before expiry to 80% one day before.
- Initial Margin AccountThe ledger account in a client's own books that records initial and additional margin paid on equity index or stock futures, shown as a current asset until the margin is released.
- Intraday Crystallised LossesA margin the clearing corporation levies in real time on losses that become certain intraday when a trade closes out an open futures position, computed on weighted average trade prices.
- Risk arrayThe set of scenarios SPAN evaluates to estimate the maximum likely loss a derivative position could suffer over the next trading day, which is what initial margin is sized to cover.
- MarginThe money a buyer or seller must deposit before a trade is allowed to stand, so that the clearing corporation is covered if they fail to bring in funds or to deliver securities.
- Assignment marginA margin collected on an option position for its final settlement obligation, on top of the initial, exposure and premium margins, levied until the pay-in towards exercise settlement is complete.