Margin Call

A margin call is a demand from a broker, clearing house or derivatives counterparty that a customer deposit additional collateral, usually cash or high-quality securities, to restore the margin supporting a leveraged position. It is triggered when the position loses value, when the value of collateral already posted falls, or when the required margin is raised. If the call is not met within the stated deadline, the lender or counterparty is generally entitled to close out the position and apply the collateral to the loss.

Margin calls are a normal, daily feature of securities lending, futures and over-the-counter derivatives. They become newsworthy when many arrive at once, forcing leveraged investors to sell assets into falling markets and spreading stress across the financial system.

• Initial margin. The collateral posted when a position is opened, sized to cover potential losses over a short close-out period.
• Maintenance margin. The minimum equity that must be kept in a margin account; falling below it triggers a call in securities and many futures accounts.
• Variation margin. Cash paid or received, often daily, to settle the change in a position's market value. In cleared derivatives a variation margin demand is effectively a routine margin call.

Collateral other than cash is usually accepted at less than market value, after a haircut. A rise in haircuts can produce a margin call even if the position itself has not moved.

In the United States, Federal Reserve Regulation T generally limits a customer's borrowing to buy listed equities to 50 percent of the purchase price, and FINRA rules require a minimum maintenance margin of 25 percent of the market value of the securities, with many brokers setting higher house requirements. The broker lends the rest, secured on the securities, a form of collateralized loan.

Example

An investor buys shares worth USD 20,000, paying 10,000 in cash and borrowing 10,000 from the broker. The investor's equity is 10,000, or 50 percent of the position. With a 25 percent maintenance requirement, a call is triggered when equity falls to 25 percent of the market value. Because the loan stays at 10,000, this occurs when the shares are worth about 13,333: equity is then 3,333, which is 25 percent of 13,333. If the shares fall to 12,000, equity is 2,000 against a requirement of 3,000, and the broker issues a margin call for at least 1,000 in cash, or the deposit of more securities. If the investor does not respond, the broker can sell shares without further notice.

Exchange-traded futures contracts and options contracts are marked to market every day by the exchange's central counterparty (CCP). Clearing members collect variation margin from losers and pass it to winners, and may face intraday calls in volatile markets. Since the post-2008 reforms, standardized over-the-counter derivatives such as many interest rate swaps must also be centrally cleared, and large firms must exchange margin on uncleared derivatives under international standards.

Margin is also central to secured funding. In a repurchase agreement (repo), if the value of the securities sold falls, the cash lender can call for more collateral. In crypto markets, exchanges offering leveraged products such as perpetual futures often skip the call altogether and automatically liquidate positions once collateral falls below the maintenance level.

When prices fall sharply, margin calls force leveraged holders to sell assets or raise cash, which pushes prices lower and triggers further calls. This feedback loop is sometimes described as a margin spiral. Historical episodes include:

• The 1929 stock market crash, when widespread buying on margin amplified the fall.
• The near-collapse of the hedge fund Long-Term Capital Management in 1998.
• The collapse of the family office Archegos Capital Management in 2021, which left several banks with large losses after it failed to meet margin calls on swap positions.
• The UK gilt market turmoil of September 2022, when pension funds using liability-driven investment strategies faced collateral calls on interest rate hedges, leading the Bank of England to buy long-dated government bonds temporarily.

Because margin calls demand cash quickly, they are fundamentally a liquidity problem as much as a solvency problem. A firm can be profitable over the life of its trades and still fail if it cannot meet calls in the short term.

Investors manage the risk by limiting leverage, keeping a liquidity buffer, diversifying collateral and stress-testing positions for large market moves. Corporate users of derivatives for hedging plan for the cash needed to meet variation margin even when the hedge is offset by a gain elsewhere that will only be realized later. Regulators, for their part, have asked CCPs to make margin models more predictable so that calls do not jump sharply in a crisis, a feature known as procyclicality.