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Over-The-Counter (OTC)For OTC derivatives, the contract between the two parties are privately negotiated
and traded between the two parties directly. Therefore, the contract can be tailormade to the two parties liking. This arrangement is very flexible, but there are
disadvantages:
Exchange-Traded (ET)For ET derivatives, the situation is different. They are traded via an intermediary,
the exchange, which is a strong institution with deep pockets. Therefore, technically
speaking, even if Tom and Dick trade a derivative between each other, their
counter-parties are not each other- rather both of their counter-parties is the same
exchange. In other words, if Tom sell an ET derivative to Dick, the exchange acts as
a buyer to Tom and a seller to Dick. The advantages of such an arrangement is:
There is no credit risk between market participants. For example, if Tom has
no need to fear if Dick defaults on the contract. If that happens, it is the
exchange that has to bear the consequences.
There is a very visible and transparent market price for the derivatives.
Types of Margin
In finance, a margin is collateral that the holder of a financial instrument has to deposit to cover
some or all of the credit risk of their counterparty (most often their broker or an exchange). This
risk can arise if the holder has done any of the following:
Intial Margin
The initial margin requirement is the amount required to be collateralized in
order to open a position.
Maintenance Margin
The amount required to be kept in collateral until the position is closed is the
maintenance requirement. The maintenance requirement is the minimum
amount to be collateralized in order to keep an open position. It is generally lower
than the initial requirement. This allows the price to move against the margin
without forcing a margin call immediately after the initial transaction.
Variation Margin
Variation margin is the additional funds that a broker may request from a client so that the initial
margin requirements of his position keep up with any losses.
SPAN
Short for standardized portfolio analysis of risk (SPAN). This is a leading margin
system, which has been adopted by most options and futures exchanges around the
world. SPAN is based on a sophisticated set of algorithms that determine margin
according to a global (total portfolio) assessment of the one-day risk for a trader's
account.
References
http://www.investopedia.com/terms/s/spanmargin.asp
http://en.wikipedia.org/wiki/Margin_%28finance
%29#Initial_and_maintenance_margin_requirements
http://contrarianinvestorsjournal.com/?p=433#