Margin & Collateral

The system's real constraint: not who has capital, but who can post it today. Every crisis of the last twenty years ran through this page.

The two margins

Every leveraged or derivative position runs on collateral, and the vocabulary splits in two:

  • Initial margin (IM) — the deposit that opens the position: a buffer sized to potential future moves (clearing houses compute it from stress scenarios). It parks; you get it back.
  • Variation margin (VM) — the daily (now often intraday) cash settlement of gains and losses. It flows: your loss is wired to the winner today, not netted at expiry.

The distinction sounds bureaucratic and decides crises: VM is a liquidity demand with a same-day deadline. A position can be profitable at maturity and still kill you on Tuesday — the definition of the 2022 UK pension (LDI) crisis and of the European utilities' 2022 margin squeeze (both hedged correctly, both nearly illiquid).

Leverage arithmetic: the distance to the exit

A 3× levered position: equity falls three times as fast, hits a margin call, and is wiped out entirely at a −33% move the unlevered holder simply sits through.
WipeoutMargin call3× leveredUnleveredUnderlying price moveEquity value
$$ \text{wipeout move} = \frac{1}{L} \qquad\quad \text{margin-call move} = \frac{1 - mL}{L(1-m)} \quad (m = \text{maintenance margin}) $$

Interactive: margin-call simulator

How far can the price fall before the broker calls — and before there's nothing left to call about?

Fall to margin call
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Fall to total wipeout
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Equity after a −10% move
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P&L amplification
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At 3× with 25% maintenance, a −11.1% move triggers the call and −33.3% ends the story. The same formulas run every broker's liquidation engine, every turbo barrier, and every crypto exchange's cascade — only the labels differ.

Haircuts: leverage set by the lender

  • A haircut is the discount on collateral's value: 2% haircut → borrow 98 against 100 → maximum leverage 50× (the repo calculator inverts it).
  • Haircuts are procyclical: calm markets shrink them (leverage builds), stress widens them (leverage unwinds, forcibly). The system's gearing is set not by regulators but by thousands of collateral schedules.
  • Rehypothecation lets collateral be reused down a chain — one Treasury securing several loans. Efficient plumbing; in failure, several claimants and one bond (a 2008 lesson re-taught on-chain by FTX).

The margin spiral — the system's core feedback loop

  • Prices fall → VM calls and wider haircuts → forced selling to raise cash → prices fall further → repeat. Brunnermeier & Pedersen formalised it; 2008, March 2020 and the 2022 gilt crisis performed it.
  • The sale is forced, so it ignores value — which is why margin-driven crashes overshoot and why "who is levered, funded how" beats "what is it worth" as the crisis question.
  • Case study, LDI 2022: UK pensions hedged rates with leveraged gilt derivatives. Gilts crashed → VM due same-day → pensions sold gilts to fund it → gilts crashed further — until the Bank of England bought the spiral to a halt. Every step was contractually correct.
  • Case study, Archegos 2021: one family office, equivalent positions at five prime brokers, none seeing the whole. One margin call started the race; the slowest banks (Credit Suisse: $5.5bn) financed the lesson about margin being counterparty-blind.

Practitioner rules

  • Measure liquidity against VM, not against P&L: the question is never only "am I right?" but "can I fund the path while being proven right?"
  • Know every trigger in advance: maintenance levels, haircut reset clauses, collateral eligibility — the exits are written in the docs, at signing, when nobody reads them.
  • Treat margin capacity as a position: unused borrowing power in calm markets is the asset that buys the fire-sale prices the spiral produces — the whole trade of "be the liquidity when others need it".