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When editing a variation it allows you to select another variation as the parent #1893
When creating a new variation in the admin, the drop down menu only lets you choose a Variation Set to which to assign it (i.e. a variation term with parent = 0).
However, when you click in to edit a variation that is already created it lets you change the parent to another variation (where term parent > 0) rather than just a variation set which is unexpected behaviour and could cause problems.
This drop down menu should only list variation sets.