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What is margining risk?

Margining risk

Margining risk is a financial term to describe the risk of cash capital being smaller than anticipated because of the payments of margins. It can additionally be viewed as a form of short term liquidity risk.

Where have you heard about margining risk?

Many companies will be aware of margining risk and will have an understanding of how the risk could become reality. One example would be if there was a collateral deposit from a counterparty to cover all or a portion of its credit risk.

What you need to know about margining risk.

Portfolio margining is a technique used to lessen the risk of a counterparty default. This means that assets within a portfolio are sorted and clustered by declining projected net loss, sometimes determined by a pricing model. You would then be able to calculate which clusters you would want to perform margin calls. There are also various data driven models – for example VaR – and these, along with carefully calculated judgement, are what best capture the potential risks in centrally cleared markets. Whether on a product or portfolio based level, the main goal of the initial margin is to cover any possible future hazards.

Find out more about margining risk.

To get a clearer understanding of margining risk, it’s useful to understand margins.

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