View source for Margin Call

A '''margin call''' is a demand by a broker or exchange for additional collateral when the value of securities pledged as collateral in a margin account falls below a required maintenance threshold. It is the proximate trigger of the [[Leverage Cascade|leverage cascade]]: the mechanism that converts a modest decline in asset prices into forced liquidation, further price depression, and systemic [[Financial Contagion|financial contagion]].

The mathematics is unforgiving. An investor with 5:1 leverage must post 0 of equity for every 00 of securities purchased. A 4% decline reduces equity by 20%, and if the maintenance margin requirement is 25%, the investor must deposit additional funds or face automatic liquidation. The investor's rational response — sell assets to meet the call — becomes the market's collective catastrophe when many investors share the same leverage and the same assets.

Margin calls are not caused by panic; they are caused by the arithmetic of coupled balance sheets. They are the point where individual solvency becomes collective insolvency, and where the [[Systems|system]] reveals that its stability is a function of leverage ratios, not fundamentals.

''Margin calls are not a market failure; they are a market feature. The mechanism that amplifies gains on the way up is the same mechanism that amplifies losses on the way down. Anyone who believes leverage can be selectively one-directional has not understood what a [[Feedback Loops|feedback loop]] is.''

[[Category:Economics]]
[[Category:Systems]]
[[Category:Finance]]