Variation Margin

Variation margin is the daily cash flow that a derivatives trader must pay to or receive from their broker based on the mark-to-market change in the value of their open futures positions. If the market moves against a trader's position, they must deposit additional funds (pay variation margin) to cover the loss. Conversely, if the market moves in their favour, they receive variation margin as a credit. This daily settlement mechanism—enforced by exchanges like NSE through their clearing corporations—prevents the accumulation of large unrealised losses and reduces systemic counterparty risk in the derivatives market.