Cross Margin
Understand cross margin in crypto derivatives: shared collateral, portfolio interaction, netting, contagion, collateral haircuts and liquidation risk.
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Cross margin allows eligible account equity to support multiple positions together. This can reduce unnecessary liquidation when one position loses while another gains, but it also connects positions: a loss in one market can consume collateral supporting unrelated trades.
What cross margin changes
Instead of reserving a fixed pool for each position, cross margin lets eligible account collateral support the combined margin requirement. Unrealised gains/losses and risk offsets may feed into account equity according to venue rules.
Positions become economically linked
Cross margin can be efficient when positions genuinely offset, but it creates collateral contagion.
| Situation | Cross-margin effect | Risk |
|---|---|---|
| One position loses, another gains | Gain may support loss | Offset can disappear |
| Two correlated positions lose together | Shared equity falls rapidly | Multiple liquidations |
| Collateral token falls | Collateral value declines | Margin shortfall without position move |
| New trade opened | Consumes shared headroom | Reduces buffer for existing trades |
Collateral quality matters
Cross accounts may accept stablecoins, major cryptoassets or multiple collateral types. Non-cash collateral can introduce an additional market-risk layer. Venues often apply haircuts so £1 of volatile collateral counts as less than £1 of margin value.
In stress, a trader can suffer simultaneously from position losses, falling collateral value and widening basis/spreads. This is one reason cross margin should be analysed at portfolio level rather than position by position.
Worked example
An account has £10,000 eligible equity, a £30,000 BTC long and a £20,000 ETH short under cross margin.
If BTC rises while ETH falls, both positions may gain and margin headroom improves. But if BTC falls 10% (roughly −£3,000 linear P&L) while ETH rises 15% against the short (roughly −£3,000), the combined unrealised loss is about £6,000 before fees/funding.
The positions looked directionally diversified because one was long and one short, but the realised correlation regime made them lose together. The remaining account buffer can become thin quickly.
Common mistakes and misunderstandings
- Assuming long/short positions automatically offset.
- Ignoring collateral-token price risk and haircuts.
- Adding a new trade without measuring its effect on shared margin headroom.
- Believing cross margin prevents liquidation because “the whole account backs it”.
- Managing each position independently when liquidation is account-level.
Knowledge checkpoint
Q1. How can a loss in one cross-margined position threaten another?
Q2. Why can volatile collateral create margin stress even if a derivative position is unchanged?
Q3. Why is one long plus one short not necessarily a hedge?
Q4. Which account-level metrics matter more than a single position’s leverage?
FAQ
❓ Is cross margin safer than isolated margin?
It can reduce unnecessary liquidation through shared equity, but increases account-wide contagion. “Safer” depends on portfolio structure and risk controls.
❓ Can profits on one position support another?
Often yes under cross margin, subject to venue recognition and risk rules.
❓ What is a collateral haircut?
A reduction in the margin value assigned to an asset to reflect its volatility/liquidity risk.
❓ Does cross margin diversify risk?
No. It shares collateral; diversification depends on actual economic exposures and correlations.
Summary
- Cross margin pools eligible collateral across positions.
- Efficiency and contagion are two sides of the same design.
- Portfolio correlation and collateral quality drive account-level risk.
- Liquidation must be analysed using the venue’s account-equity and maintenance rules.
Use this lesson as one component of a wider risk and execution process. Derivative specifications, margin formulas, settlement and loss-allocation rules can differ substantially between venues.
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