Lending · Private Credit
Margin Calls and Liquidation
Acting on deterioration, before default.
A facility’s protection is not the borrower’s solvency but the sequence of actions that begins when collateral value falls. That sequence, thresholds, notice, cure period and liquidation rights, is written into the documents before a dollar is advanced, and it is designed to complete while the collateral still covers the loan.
Thresholds
Each facility has a margin call threshold, a loan-to-value ratio above which the borrower is required to restore the position, and a liquidation threshold above which the lender may sell collateral without further notice. The gap between initial ratio and call threshold is the borrower’s room; the gap between call and liquidation thresholds is the cure window in price terms.
The call and the cure period
When the call threshold is crossed, the borrower is notified through the channel the documents specify and has a defined period to add eligible collateral or pay down principal. The cure period is set from the collateral’s volatility: long enough to be workable for a professional borrower, short enough that a normal move cannot carry the position through the liquidation threshold before it ends.
Liquidation
If the call is not cured, or if price moves through the liquidation threshold first, the lender instructs the custodian to release collateral for sale. Sales are executed across venues to minimize impact, only in the amount needed to restore the ratio, with any surplus returned to the borrower. The order of operations, venues and price sources are pre-agreed. Unlike a decentralized lending protocol, where a smart contract liquidates the instant a line is crossed, the facility gives notice and time; unlike an unsecured loan, it does not wait for default.
Insolvency
If a borrower files for insolvency, an automatic stay may bar the lender from liquidating, and spot digital asset loans may not qualify for the safe harbours that protect securities and commodity contracts. The margin mechanics are therefore designed to operate on collateral deterioration, which occurs before any filing, and the lender’s control of the collateral is perfected under the applicable commercial law from day one.
Practice
How Wesvel approaches it
- 01Thresholds, notice channels, cure periods and liquidation rules are fixed in the facility documents.
- 02Marks run continuously and calls are issued automatically when a threshold is crossed; the decision is not discretionary.
- 03Liquidations are executed across venues in the amount required, with the process and price sources agreed in advance.
- 04Control of collateral is perfected at closing so the lender does not depend on borrower cooperation at default.
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