Margin refers to the collateral, typically in cash or liquid securities, that a market participant must deposit with a broker, exchange, or clearinghouse to cover potential losses on leveraged positions. It functions as a performance bond, ensuring that obligations arising from trading activities can be met. In crypto trading, margin is essential for derivatives, futures, and leveraged spot positions.
Mechanism
Upon opening a leveraged position, an initial margin is required. As the market price of the underlying asset fluctuates, the position’s value changes, necessitating adherence to maintenance margin requirements. If losses cause account equity to fall below the maintenance margin, a margin call is issued, demanding additional funds or collateral. Failure to meet this can result in automatic position liquidation.
Methodology
Effective margin management involves continuous monitoring of position risk, dynamic calculation of margin requirements, and automated liquidation protocols. In crypto institutional options trading and RFQ systems, sophisticated risk engines calculate real-time margin requirements across diverse digital assets, accounting for volatility and correlation. This methodology helps mitigate counterparty and systemic risk, ensuring market integrity while optimizing capital utilization through leverage.
A CCP's default waterfall mutualizes losses through a tiered, systemic defense, while a bilateral close-out privatizes loss via direct, contractual termination.
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