Margin Call
A demand from a broker or exchange for an investor to deposit additional funds when their leveraged position's losses reduce account equity below the required maintenance margin — the mechanism that transforms individual losses into systemic cascades.
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What Is a Margin Call?
A margin call occurs when an investor's margin account falls below the broker's required maintenance margin level. The broker demands that the investor either deposit additional cash/securities or sell positions to bring the account back above the minimum.
Example: An investor buys $1M of stocks using $500K of their own money and $500K of borrowed margin. If the stocks fall 30% to $700K, the equity is $200K ($700K - $500K loan). If maintenance margin is 25% of position value ($175K minimum), the investor is close to a margin call.
Why Margin Calls Matter Systemically
Individual margin calls are routine. But in market crises, margin calls become a feedback loop:
- Asset prices fall
- Leveraged investors receive margin calls
- They must sell assets to meet margin requirements
- Selling pushes prices down further
- This triggers margin calls on other leveraged investors
- → Cascade
This "margin call spiral" was a key amplifier in the 2008 GFC, the March 2020 COVID crash, the 2022 crypto bear market, and the October 1987 crash.
Variation Margin in Derivatives
In futures and cleared derivatives markets, daily "mark-to-market" creates daily cash flows:
- If the position moves in your favour, you receive variation margin
- If against, you pay variation margin to the exchange clearinghouse
This daily settlement is designed to prevent the accumulation of large unsettled losses — but it also means daily cash calls that can force liquidation in illiquid markets.
Cross-Asset Margin Calls
A particularly dangerous type occurs when a fund faces margin calls in one market and must sell liquid, unrelated assets to raise cash:
- A hedge fund overleveraged in fixed income sells equities to meet margin calls (spreading contagion)
- Crypto lenders faced margin calls in June 2022; to meet them, they sold BTC and ETH, exacerbating the crash
Monitoring Risk
- COT report: Shows speculative positioning; high leverage = margin call vulnerability
- Repo market rates: Spiking repo rates signal funding stress that precedes forced selling
- VIX spike + credit spread widening: Classical signature of margin call cascade in equities
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