Margin call

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Prime Brokerage Anatomy™

There is no industry standard prime brokerage agreement, so this is not so much an anatomy as a collection of resources about an amorphous subject.
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There is much to say on the topic of prime brokerage margining. Generally,[1] prime brokers have very broad rights to adjust required margin, on short or immediate notice, and to call for more margin, which they can do (at least) daily. You cannot say it loudly enough: margin is a prime broker’s only meaningful defence. If you have enough margin, none of your other protections matter. If you don’t, none of your other protections work.

Margin falls into two categories: margin your broker legally requires you to post — “required margin” — and margin over and above that, that it doesn’t require as such, and which it will return to you if you ask it, but which it is rather pleased you have given it to hold all the same — this is “margin excess”.

Adjusting margin is the process of (re)calculating how much margin you think you’d need, were the world to go to hell overnight and all of Satan’s angels to trample on your Monte Carlo simulations. Having made that calculation, it usually becomes live immediately,[2] meaning you can repurpose any margin excess standing to the credit of your own accounts instantly. If a broker has agreed to “lock up” its margin calculations, it may not be able to convert margin excess to required margin, and therefore will have to give it back.

Calling for margin means demanding that your client pay you some more margin. This you only need to do if there is not enough margin excess to cover the whole of your margin adjustment.

What a creditor does to a debtor under a margin lending arrangement, if the value of the loaned assets drops in value and there is insufficient excess.

I lent you 70 against an asset worth 100, on the condition that the asset would be worth 30 more than my loan.
The Asset has fallen in value to 90.
I therefore call you for 10 of margin.

Here a “margin lending arrangement” could be a swap, future, stock loan or margin loan — any financial transaction where there one party invests in an asset on terms on which the other party (effectively) finances it.

Initial margin and variation margin

Margin comes in two forms.

  • Variation margin, or VM, is collateral against the present mark-to-market value of the transaction exposure.
    • If you don’t have this and the counterparty goes bust, you’re whistling.
    • In many kinds of margin loan, VM will take the form of the asset in question itself.
  • Initial margin, or IM, is additional collateral in excess of the present mark-to-market value of the transaction exposure.
    • This guards against sudden adverse movements in the value of the collateral or the exposure between margin calls.
    • IM is calculated by reference to the expected maximum loss in value of the transaction (and the existing margin) over the margin period.

See also


  1. But see the vexed topic of margin lock-up, which significantly constrains the PB’s flexibility.
  2. Archegos had a three day notice period, which interposed some rather gristly squeaky-bum time between your adjustment and it going live, which the Credit Suisse risk team weren’t willing to endure.