Margin Call - When Being Right Is Not Enough

By EC Assets Research Team, Institutional Research · Published 29 October 2026

Margin Call: A margin call is a demand to add collateral to a leveraged position, triggered when losses or a higher margin requirement leave too little equity in the account. It has to be met in cash or eligible securities within a short deadline, usually a day, whatever the position's long-run prospects, and positions are closed if it is not.

What a Margin Call Is

A margin call is a demand from a broker, clearing member or counterparty for more collateral on a leveraged position. Leverage means part of the position is financed or not paid for at all, and the lender protects itself by requiring a cushion of the borrower's own equity. When losses, a higher requirement or a cut in the value assigned to collateral leave the cushion too thin, the lender calls for more, and if the call is not met it closes positions.

What makes margin calls dangerous is not the loss itself but its timing. A call has to be met in cash or eligible securities by a deadline, typically within a day for cleared derivatives, regardless of whether the position will recover. A leveraged investor can be right about the eventual outcome and still be forced out at the worst point, which is why margin is as much a liquidity question as a market-risk question.

How It Works

Securities margin. In a US margin account, Regulation T requires an initial equity contribution of at least 50 percent of the purchase price, and FINRA Rule 4210 requires equity of at least 25 percent of the position's value thereafter; brokers often set higher house requirements. If i is the initial equity fraction and m the maintenance fraction, a call is triggered when the price falls to

$$P_{\text{call}} = P_0 \times \frac{1 - i}{1 - m}$$

With the regulatory minimums that is two thirds of the purchase price, a fall of one third. A house maintenance requirement of 30 percent brings the trigger forward to a fall of 28.6 percent.

Derivatives margin. For futures and cleared swaps, initial margin is a deposit set by the clearing house as a percentage of notional exposure, sized to cover the losses that could build up before a defaulting position is closed out. Variation margin then settles each day's change in value in cash. Initial margin rates are recalculated from recent volatility, so they rise when markets become turbulent.

The two components compound in stress: losses create variation margin outflows, and the same volatility raises initial margin on whatever position remains.

Worked Example

A fund with 2.00 million in cash holds a long equity index futures position with a notional of 10.00 million. The clearing house requires initial margin of 6 percent, so 0.60 million is posted and 1.40 million is free. The index then falls 5 percent in a day, and the clearing house, seeing volatility jump, raises the initial margin rate to 8 percent.

Free cash is the 2.00m of starting cash less the initial margin posted and the variation margin paid.

A 5 percent market move has cost the fund 0.50 million, a quarter of its capital, but it has had to find 0.66 million of cash within a day, a third of its capital. Had the free cash been invested in anything that cannot be sold within hours, the fund would have had to cut the futures position at the low, or sell other assets into the same falling market.

When It Applies (and Limitations)

Margin rises across the system at once. In March 2020 initial margin requirements at central counterparties rose by roughly 300 billion dollars, and daily variation margin calls rose from an average of 25 billion dollars to a peak of 140 billion on 9 March, according to the review of margining practices by the BCBS, CPMI and IOSCO (2022). Every leveraged holder faced the same calls on the same days.

Calls feed back into prices. Brunnermeier and Pedersen (2009) show how falling prices raise margins and force sales that lower prices further and tighten funding again, a spiral that links market liquidity and funding liquidity. Garleanu and Pedersen (2011) show that assets which tie up more margin must offer higher expected returns, most of all when funding is scarce.

Hedges can create calls too. A position that offsets an economic exposure can still demand cash when only the hedge is margined. In September 2022, UK liability-driven investment funds held leveraged gilt positions through repo and interest rate swaps to hedge pension liabilities; when gilt yields jumped they faced collateral calls on those positions, while the matching fall in the value of the liabilities produced no cash. Their gilt sales pushed yields further until the Bank of England began temporary purchases of long-dated gilts on 28 September. Pinter (2023) finds that the firms with the largest repo and swap exposure sold the most gilts.

Not all leverage is margined daily. Bank loans, private credit facilities and some bilateral agreements revalue collateral less often or at the lender's discretion, which delays calls but can make them larger and less predictable when they come.

Why It Matters for Institutional Investors

Liquidity has to be sized for the stressed day. The cash needed is variation margin on a severe move plus the initial margin increase that comes with it. Stress testing both together, rather than the market loss alone, is the core of collateral planning.

Collateral terms are part of the trade. Haircuts, eligible collateral, notification deadlines and the lender's right to change them determine how a position behaves under stress. In a prime brokerage relationship these terms can change at short notice, which is a risk in its own right.

Leverage is a liquidity decision. Leverage magnifies returns, but margined leverage also turns paper losses into immediate cash needs. A position that cannot survive its own margin calls is sized by the lender's terms, not by the investor's view.

References

1. Brunnermeier, M. K., & Pedersen, L. H. (2009). Market Liquidity and Funding Liquidity. Review of Financial Studies, 22(6), 2201-2238.
2. Garleanu, N., & Pedersen, L. H. (2011). Margin-Based Asset Pricing and Deviations from the Law of One Price. Review of Financial Studies, 24(6), 1980-2022.
3. Basel Committee on Banking Supervision, Committee on Payments and Market Infrastructures, & International Organization of Securities Commissions (2022). Review of Margining Practices. Bank for International Settlements.
4. Pinter, G. (2023). An Anatomy of the 2022 Gilt Market Crisis. Bank of England Staff Working Paper No. 1019.
5. Board of Governors of the Federal Reserve System. Regulation T: Credit by Brokers and Dealers, 12 CFR Part 220.