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.
Check yourself
1.Trader A wants to sell 20 contracts of the August series at ₹4,500 and Trader B wants to sell 17 contracts of the September series at ₹4,550. Lot size is 50 for both contracts. Initial margin is fixed at 6%. How much initial margin in total must the broker collect from these two investors?
- a)₹2,70,000
- b)₹5,02,050
- c)₹2,32,050
- d)₹4,10,000
Show the answer
Answer: (b) ₹5,02,050
Compute each trader separately, then add.
Trader A: 20 × 50 × ₹4,500 = ₹45,00,000 contract value. Initial margin at 6% = ₹2,70,000.
Trader B: 17 × 50 × ₹4,550 = ₹38,67,500 contract value. Initial margin at 6% = ₹2,32,050.
Total = 2,70,000 + 2,32,050 = ₹5,02,050
Option A (₹2,70,000) is Trader A's margin alone — the answer of anyone who stopped after the first calculation. Option C (₹2,32,050) is Trader B alone. Both are deliberately placed as the two halves of the correct answer.
Two further points the question is quietly testing. First, both are selling, and there is a persistent instinct that sellers pay less margin or that two sellers might somehow offset — neither is true, because both buyers and sellers pay initial margin and client positions are margined gross at the individual client level. Second, they hold different contract months at different prices, so there is no netting even in principle.
2.Mark-to-market margins are collected ___________.
- a)On a weekly basis
- b)Every 2 days
- c)Every 3 days
- d)On a daily basis
Show the answer
Answer: (d) On a daily basis
MTM margins are collected on a daily basis. The workbook describes MTM settlement as happening on a continuous basis at the end of each day, with the pay-in and pay-out effected before the start of market hours on the next day.
The other three options all describe multi-day cycles, and every one of them would defeat the purpose. The reason initial margin can be as small as it is — a few percent of contract value — is that it only has to cover one day of price movement. Let losses accumulate for a week and the margin would be nowhere near enough.
This also explains why all open positions are reset to the daily settlement price after the day's settlement: yesterday has been paid in cash, so the position starts fresh from the new price. The entry price is gone.
3.Margins in futures trading are to be paid by _______.
- a)Only the buyer
- b)Only the seller
- c)Both the buyer and the seller
- d)The clearing corporation
Show the answer
Answer: (c) Both the buyer and the seller
Both buyers and sellers of a futures contract pay initial margin, because there is an obligation on both parties to honour the contract. Either side can end up owing money depending on which way the price moves.
Options A and B assume only one side is at risk, which is wrong for a linear instrument where both parties face unlimited profit or loss. Option D reverses the flow: the clearing corporation collects margins, it does not pay them. It charges margins from brokers, who in turn charge their clients.
Where this is taught
- Series V-D · Chapter 15: Introduction to Forwards and Futuresintroduced here
- Series XVI · Chapter 7: Clearing, Settlement and Risk Managementintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series X-A · Chapter 10: Understanding Derivativesintroduced here
- 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 marginThe VaR and Extreme Loss percentage from the Capital Market segment applied to client level settlement obligations, charged in addition to initial margin.
- Premium marginMargin charged at client level covering the premium due to be paid to the clearing corporation, levied until pay-in towards premium settlement is complete.
- 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.
- 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.
- 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.