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Collateral in the derivatives market functions similarly to a secured loan, where an asset (like a car) is pledged to protect a lender. In this context, assets are used to safeguard counterparties from potential losses. As the market value of a derivative trade can fluctuate daily, variation margin is implemented to adjust for these changes. For instance, if two parties engage in a ten-year interest rate swap and its market value shifts by $1, then $1 in collateral is exchanged to cover that change. New regulations mandate that firms post variation margin for their trades, and many financial institutions must also provide initial collateral before trading. This framework aims to enhance market safety and reduce risk in financial transactions.