Maintenance Margin

Maintenance margin is the minimum amount of equity, expressed as a percentage of the total position value, that a trader must maintain in their margin account to avoid a margin call. It acts as a safety buffer for the broker or exchange, ensuring the trader has sufficient collateral to cover potential losses. If the account's equity falls below this required level due to adverse price movements, the trader must either deposit more funds or face liquidation of their position.

The maintenance margin requirement is distinct from the initial margin, which is the deposit required to open a leveraged position. For example, with 10x leverage, the initial margin might be 10%, while the maintenance margin could be set at 5%. This means if a $10,000 position drops in value so that the trader's equity (the initial deposit minus losses) falls below $500 (5% of $10,000), the maintenance margin level is breached. These levels are set by exchanges or brokers and vary by asset and market volatility.

When the account equity dips below the maintenance margin, it triggers a margin call. This is a demand from the broker for the trader to deposit additional funds (variation margin) to restore the equity to at least the maintenance level. In decentralized finance (DeFi) and many centralized crypto exchanges, this process is often automated; positions are liquidated immediately without a traditional call to prevent the platform from taking a loss. The formula for calculating the margin level is: (Equity / Used Margin) * 100%.

Understanding maintenance margin is critical for risk management in leveraged trading. It directly influences a position's liquidation price—the price at which the account equity equals the maintenance margin, triggering automatic closure. Traders must monitor this price closely, as high volatility can lead to rapid liquidations. Strategies like using stop-loss orders or maintaining equity well above the minimum requirement are essential to mitigate this risk and avoid forced exits from positions.

In traditional finance, maintenance margin rules are set by regulators like the Financial Industry Regulatory Authority (FINRA), which mandates a minimum 25% maintenance margin for most stocks. In contrast, cryptocurrency markets often have much higher requirements due to extreme volatility; maintenance margins can range from 5% to 50% or more on perpetual futures contracts. This reflects the higher risk profile of the underlying assets and the need for exchanges to manage their counterparty risk effectively.

Maintenance margin is the minimum amount of equity a trader must maintain in their leveraged position, expressed as a percentage of the total position value, to avoid a margin call or liquidation. This requirement is a core risk parameter set by exchanges or brokers to ensure they can cover potential losses if the market moves against the trader's position. It acts as a safety buffer below the initial margin required to open the trade.

When the value of the leveraged assets declines, the trader's equity (the value of the position minus the borrowed funds) decreases. If this equity falls below the maintenance margin threshold, the account becomes under-margined. At this point, the platform will issue a margin call, typically requiring the trader to deposit additional funds (variation margin) to restore the equity level. Failure to do so promptly triggers an automatic liquidation, where the platform forcibly closes some or all of the position to repay the loan.

For example, with a 10% maintenance margin on a $10,000 position funded with $4,000 of the trader's own capital and $6,000 borrowed, the minimum required equity is $1,000 (10% of $10,000). If losses cause the position value to drop to $9,000, the equity becomes $3,000 ($9,000 - $6,000 loan), which is still above the $900 maintenance requirement. However, if the value falls to $8,500, the equity drops to $2,500, triggering a margin call as it is now below the $850 threshold.

The maintenance margin level is dynamic and is continuously monitored by the exchange's risk engine in real-time. In volatile markets like cryptocurrency, prices can move rapidly, sometimes causing a position to be liquidated before a trader can even respond to a margin call. This is why understanding the liquidation price—the price at which equity equals the maintenance requirement—is crucial for managing leveraged positions.

Different asset classes and trading pairs have varying maintenance margin rates, reflecting their perceived risk and volatility. Highly volatile assets typically require a higher maintenance margin. Traders must also consider cross-margin versus isolated margin modes; in isolated mode, the maintenance requirement and potential liquidation are confined to a single position's collateral, while in cross-margin, the entire account balance backs all open positions.

Liquidation is the forced closure of an undercollateralized loan or leveraged position by a protocol or exchange to prevent losses for lenders or the system. This automated enforcement mechanism is triggered when the value of a user's collateral falls below a predefined maintenance margin or liquidation threshold, making the position insolvent. The primary purpose is to protect the protocol's solvency by ensuring that outstanding debt is always backed by sufficient collateral, even in volatile market conditions.

The process begins with liquidation monitoring, where bots or keeper networks constantly scan the blockchain for positions that have become undercollateralized. When a position's health factor or collateral ratio drops below 1.0 (or 100%), it becomes eligible for liquidation. Liquidators—third-party actors incentivized by a liquidation bonus or fee—then step in to repay a portion or all of the outstanding debt on behalf of the position holder. In return, they seize the associated collateral at a discount, profiting from the difference.

Key parameters governing this process include the liquidation threshold (the collateral value ratio at which liquidation starts), the liquidation penalty (the discount applied to the seized collateral, also known as the liquidation bonus for the liquidator), and the close factor (the maximum percentage of debt that can be liquidated in a single transaction). Different protocols, such as Aave, Compound, and MakerDAO, implement variations of this model, but the core economic security principle remains consistent: automated, incentivized enforcement of collateralization.

For the trader, a liquidation event results in a significant loss of their collateral beyond the initial market move. A liquidation cascade can occur in highly volatile markets, where a wave of liquidations drives asset prices down further, triggering even more liquidations—a phenomenon akin to a margin call spiral in traditional finance. Understanding the specific liquidation parameters of a protocol, maintaining a healthy buffer above the threshold, and using tools like stop-loss orders or debt monitoring dashboards are critical risk management practices for any leveraged position.