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Collateral in the derivatives market serves to minimize risk for counterparties, similar to how a secured loan works. In a secured loan, an asset like a car is pledged as collateral, which the lender can reclaim if the borrower defaults. In derivatives, assets are used to safeguard against potential losses. Since the market value of a trade can fluctuate daily, variation margin is essential. For instance, in a ten-year interest rate swap, if the trade's value changes by $1, a dollar of collateral is exchanged to ensure firms are compensated if the trade concludes prematurely. New regulations mandate that firms post variation margin and a portion of collateral, known as initial margin, before engaging in trades with one another.