Margin call and collateral
The requirement to post liquid assets when a position moves against you, turning an accounting loss into an immediate cash need.
Collateral is the asset posted to a counterparty to secure a position. A margin call is the demand to top it up once the position has moved adversely since the last valuation. The mechanism prevents the silent build-up of counterparty exposure, and it works. But it has an effect solvency models capture poorly: it converts a change in value into a day-to-day liquidity requirement, where insurance reasons over long horizons. Two features make it dangerous. First, procyclicality: calls arrive exactly when markets are falling and selling is dearest, pushing every counterparty the same way at the same time. Second, opacity: one counterparty may deal with several intermediaries that each see only part of the position, so none prices its own risk correctly. For an insurer the useful question is how much an adverse shock would demand within days, and which assets could actually be mobilized to provide it.
In March 2021, the family office Archegos Capital Management failed to meet its margin calls. Positions held through several banks were unwound in a disorderly way. Credit Suisse, one of them, reported a loss of around 5.5 billion dollars on that single exposure.
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