OPINION: As the UK budget looms, we should remember how margin can unravel markets
24th November, 2025|By Neil Murphy, director, trade lifecycle, OSTTRA
Ahead of the Budget later this month, markets are focused on fiscal signals and policy, as the Chancellor seeks to reassure investors over the UK’s public finances. But beyond the political theatre, there is a subtler financial balancing act that policymakers and investors alike must remember. It is not in the gilt curve or debt issuance trajectory, but in the plumbing of the derivatives markets — the mechanics of margin.
Those on derivative desks will be very familiar with how events can create a margin spiral. The UK Budget set off alarm bells in the financial system in September 2022 when the so-called “mini-budget” triggered a sharp sell-off in gilts. What began as loss of confidence in government policy quickly morphed into a crisis of liquidity for pension funds running liability-driven investment (LDI) strategies. As gilt yields soared, those funds were hit by significant variation margin calls on their derivatives positions, creating margin calls that could only be met by liquidating assets quickly. The result was a vicious cycle of falling prices which led to more margin calls, forcing more selling, until the Bank of England intervened.
The lesson should have been seared into institutional memory. Yet, with extreme bouts of volatility regularly showing up in global markets, there is a danger the operational and liquidity stresses exposed by the 2022 sell-off are not front of mind. Margining remains one of the least visible, but most powerful, transmission channels for market stress. And it needs attention.
At its core, a margin call is simple: when the value of posted collateral no longer covers exposure, more must be delivered. In calm markets, that’s routine. But under strain, it can become a race for liquidity. The difficulty is practical, as sourcing and funding eligible collateral fast enough to meet ever-shorter settlement windows makes funding conditions tight. This becomes a vicious circle, as when multiple participants face those calls simultaneously, liquidity can drain from the system faster than funding markets can replenish it.
During the March 2020 “dash for cash”, global variation margin calls at clearing houses jumped from an average of $25 billion to nearly $140 billion in a matter of days. There was a similar sharp increase in margin being exchanged in over-the-counter (OTC) derivatives after the ‘Liberation Day’ tariffs this year, with OSTTRA data showing the total value of calls rose by 180% in just eight days. In all cases, the dynamic was the same: well-functioning risk controls became catalysts for systemic stress once markets were jolted by extreme volatility.
That experience should be front of mind as the UK Treasury readies a Budget in a market still adjusting to higher rates and a relatively high sovereign debt issuance. Any surprise that unsettles the gilt market could again reverberate through the collateral chains that underpin the derivatives ecosystem.
For market participants, the imperative is clear: margin management is no longer a back-office process but a front-line liquidity risk. Firms need to move from a rigid, reactive approach to proactive, agile operational resilience. This means being able to mobilise collateral rapidly across entities, currencies and counterparties, and ensuring funding lines can cope under stress. Liquidity stress testing must incorporate margin shocks, modelling price moves and also the operational and funding strain they create.
Standardisation and automation are also fundamental to creating more adaptable and resilient operations. For example, companies could automate workflows which helps to seamlessly manage sudden surges in margin call volumes across the whole call lifecycle, from calculation to settlement.
Regulators also have a role to play. The Financial Stability Board and European Central Bank have both warned of the pro-cyclical nature of margining and the need for transparency around aggregate margin flows. Better coordination between central counterparties, clearing members and buy-side participants can reduce the suddenness of liquidity calls when volatility hits. The aim should not be to disrupt margining processes, but ensure it does not become a source of instability. Derivatives desks and operations teams would do well to remember this and take steps to proactively manage this process as they prepare for this eagerly anticipated Budget.
