[dmurray]

Say you have a long term position in a derivative (like a future, or a mortgage bond in this case). If the market value of that goes up, the counterparty pays you straight away, instead of waiting until it expires months or years from now. Likewise, if it goes down, you pay the counterparty. This payment is called variation margin.

Typically a bank will have a roughly hedged position: if one of its assets goes down in value, another one goes up and it uses the variation margin on one to pay off the other. But consumer mortgages don't get variation margin: the homeowner doesn't pay the bank if interest rates drop and he now is locked into (in hindsight) a bad deal. Instead he just pays the bank over the odds for the next 10 or 30 years.

In some products you square up the variation margin every day or every week. It sounds like the mortgage bonds aren't done that rigorously and the dealers square them up whenever they feel like it, or when the regulator insists. Here some mortgage banks are going to have to find the cash flow to pay that variation margin, if they owe their dealer more than $250k in total.