Margin calls and liquidations: the same job, done differently

The shared problem

A party that is owed money holds collateral against the risk that the other side cannot pay. As prices move, the collateral has to keep up with the exposure. When it falls short, something has to happen.

How traditional clearing does it

• Who decides. The CCP calculates exposure and calls margin. Under EU rules a CCP “shall impose, call and collect margins to limit its credit exposures from its clearing members” [2].
• When. At least daily, with intraday calls. The international standard expects a CCP to have the capacity “to make intraday margin calls and payments, both scheduled and unscheduled” [1]. In March 2020 most calls were still end-of-day, but “there were significant intraday VM calls during the most stressful period” [3].
• The response. The member posts more collateral by a deadline. If it cannot, the CCP may declare a default, which can be automatic or discretionary depending on its rules [1]. It then hedges the open positions and may auction them to other members [1] [4]. Losses are met first from the defaulter's margin, then from its default fund contribution, before other resources [2].
• Human judgement. Rulebooks set out the procedure in advance, and a default management group, often of staff seconded from members, advises the CCP on hedging and auctions [4].

How a DeFi lending protocol does it

The example here is Aave. Other protocols differ in detail.

• Who decides. A smart contract. It values each position's collateral with prices from an oracle, weights it by each asset's liquidation threshold and divides the result by the debt; this gives a “health factor” [5] [6].
• When. Continuously. A position can be liquidated as soon as its health factor falls below 1 [6].
• The response. No call is made. Any third party, a “liquidator”, can repay debt and receive the corresponding collateral “plus a bonus” [6]. By default a liquidator may repay up to half of the debt, and all of it when the health factor falls below a lower threshold or the position is small [16]. A BIS Bulletin describes the same mechanism: “anyone can act as liquidator and seize the collateral, repay the lender and pocket a share of the residual collateral” [7].
• Human judgement. Little at the moment of action. Governance sets the parameters in advance: loan-to-value ratios, liquidation thresholds and bonuses, price sources, and supply and borrow caps for each asset [5].

Side by side

	CCP margin	DeFi liquidation (Aave)
Trigger	A margin call after the CCP's calculation [2]	Health factor below 1, on oracle prices [6]
Grace period	A deadline to meet the call	Usually none; some deployments add one after an outage of the network they run on [5]
Who acts	The CCP and its default process [1]	Any liquidator [7]
Collateral outcome	Kept if the call is met; otherwise default management	Partly or wholly taken by the liquidator, with a bonus [6]
Main risks	Procyclical calls and liquidity strain on members [3] [9]	Oracle errors or manipulation, liquidation cascades, smart-contract bugs [8]

The risks are not hypothetical on either side:

• Clearing. After March 2020 the FSB found that margin calls “may have been larger than expected in some cases, challenging liquidity risk management for some market participants” [9].
• DeFi. The FSB warns that collateral “may be forcibly liquidated into a market with low liquidity, pushing collateral prices down further, and spreading contagion” [8]. A BIS Bulletin records a price manipulation attack on the Venus protocol that led to liquidations of more than $200 million [7].

What each can learn from the other

• Institutional markets can borrow continuous, transparent collateral monitoring and automated, rule-based execution for well-defined steps.
• DeFi can borrow margin calls before liquidation and a defined default waterfall. The FSB notes that in traditional finance, self-reinforcing sell-offs can be eased by orderly liquidation at central counterparties, and that this mechanism is absent in DeFi [8]. Aave already caps supply and borrowing for each asset [5].
• Permissioned and hybrid pools sit between the two. Aave Arc launched in 2022 with a whitelist of licensed trading firms [10]. Aave Horizon, launched in 2025, lets institutions borrow stablecoins against tokenised assets such as US Treasury funds: compliance checks are built into the collateral tokens, while the lending pools themselves stay open [11].

Where this matters next

Tokenised money market funds and Treasury funds are now used as collateral in both worlds:

• Traditional markets. Tokenised MMF shares were posted as collateral for an OTC derivative between BlackRock and Barclays in 2023 [12]. Tokenised MMF units and gilts were used as collateral for FX trades between Aberdeen and Lloyds in 2025 [13].
• Crypto venues and DeFi. A tokenised Treasury fund has been accepted as collateral on crypto trading venues [14], and another as collateral on Aave Horizon [15].

The operating question for a post-trade team is which of the two models a given venue follows, and what that means for funding when prices move fast. See our deep dive: Tokenised money market funds as collateral.