Margining and Liquidations, Part 2: Cross Margining

This is part two of our Margining and Liquidations series. Go back to Part 1 to understand the basics of isolated markets. Here we’ll discuss (additive) cross-marginated markets, which are a generalization of isolated markets.

Cross Markets

Cross “additive” markets share a single pool of collateral across every position in the bucket. Most venues will have multiple cross buckets, for example all USDC-marginated markets, all USDT-marginated, etc.

• Equity: same idea as for isolated markets, except unrealized profits are now summed across all positions

  $$\mathsf{Equity}=\mathsf{collateral}\mathsf{balance}+\sum \mathsf{unrealized}P\&L$$

• Initial Margin $\mathsf{IM}$: each market retains the IM computation as in isolated markets. But now the whole account gets a total IM by adding them all (hence “additive”)

  $$\mathsf{IM}=\sum {\mathsf{IM}}_i=\sum \frac{{\mathsf{notional}}_i}{{\mathsf{max}\mathsf{leverage}}_i}$$

• Available Collateral: we used this implicitly for isolated markets. It’s the collateral you have available to open new positions; not yet used to cover to initial margin of other positions.

  $$\mathsf{Available}=\mathsf{Equity}-\mathsf{IM}$$

  You’ll be able to open positions as long as you have enough available collateral: ${\mathsf{Available}>\mathsf{IM}}_{\mathrm{new}}$ (the Initial Margin of the new position you want to open).

• Maintenance Margin: same generalization as Initial Margin. In crossed markets, you add up the MMs of each position to get the total Maintenance Margin.

  $$\mathsf{MM}=\sum {\mathsf{MM}}_i=\sum \frac{{\mathsf{notional}}_i}{{\mathsf{max}\mathsf{leverage}}_i}$$

  Here again, the maximum maintenance leverage is in general higher to the initial leverage, thus it still holds that $\mathsf{IM}\ge \mathsf{MM}$.

  In short, you get liquidated once your equity falls below margin: $\text{Equity < MM}$. In general, venues will only liquidate a part of your positions, not all.

Notice how isolated markets are just the special case of one position: $\mathsf{IM}$ and $\mathsf{MM}$ each collapse to a single term, and $\mathsf{Available}=\mathsf{Equity}-\mathsf{IM}$ reduces to part 1's plain $\mathsf{Equity}>\mathsf{IM}$. Cross margining doesn't introduce a new mechanism: it's the same $\mathsf{E}$, $\mathsf{IM}$, $\mathsf{MM}$ machinery, just shared.

Subtlety: Hedges don’t net

Here's something that can be surprising: $\mathsf{IM}$ and $\mathsf{MM}$ sum each position's requirement independently, with no regard for how the positions relate to each other. If you're holding two positions that hedge one another (long on one market, short on a closely correlated one) your net risk is close to zero, but the margin math doesn't know that.

Take a long 1 BTC-PERP and a short 1 BTC-PERP-equivalent on a correlated market, both at 10x leverage, BTC currently at $100. Since the hedge cancels P&L, equity stays roughly flat throughout. But $\mathsf{MM}$ doesn't net:

Even if your P&L is flat, you’re still required the $10 collateral on each position ($20 total).

Now BTC rallies to $200. The hedge is still holding, so equity barely moves. But $\mathsf{MM}$ does not stay flat, it scales:

You haven’t made nor lost a dime, but your collateral requirements just doubled. If you didn’t deposit enough collateral to cover that… you may have been liquidated.

Closing

Now you understand how cross margining works, hedges and all. Consider reading Part 3 for scenario-based margining, which fixes exactly the hedge problem above by netting risk jointly instead of summing it position by position.