Margin Calls – How Can Investors Protect Their Position?

1 INTRODUCTION

Following the recent market shakedown amidst the Covid-19 pandemic, banks have been issuing margin calls to their counterparties.

Who is affected? Broadly speaking, two types of investors: The first category are wealthy clients who have been investing in stock markets on a leveraged basis, through so-called Lombard loans, which are secured against a portfolio of liquid assets like equities and bonds. The other category comprises counterparties who have entered into derivatives transactions or secured lending agreements with banks.

In simple terms, a margin call is the demand by the bank to increase the collateral or to reduce the credit exposure of the bank by repaying a part of the loan.