What happens if you can’t pay your margin call?
Here is what happens if you can’t pay your variation margin.
Let’s say that John Doe is a trader, who has been actively trading futures and options. Unfortunately, he was short a decent number of calls on stock ABC, which has just been announced as the target of a hostile take-over. ABC’s stock price immediately gaps 25% up and becomes very volatile at this new level.
That evening, the exchange asks John to deposit $1,000,000 as a margin call. John doesn’t have that kind of money.
Because the market was already adverse for John and probably still is, the trades are expensive. The liquidity might not be there. But even if the traders pay attention to the prices and the liquidity, they have to close the account quickly, and that’s usually expensive. Let’s say that this closing effort, maybe taking several days, costs an additional 300k$.
If John was actually a large trading house (or a clearer!), the exchange has a special procedure to auction the entire portfolio to other trading houses and market participants. This is what happened to Ronin in March 2020.
It may take 2-3 of years from there, but the likely outcome is that John will lose his legal case, will have to pay the $1.3 m, as well as both his and the clearer’s attorney fees. If he has a house, he will lose it.
If you trade on a derivatives exchange, your profits will be paid to you, or you will pay your loses with your house.