How Do Cross-Margining Practices Affect the Risk of a Death Spiral across Different Asset Classes?

Cross-margining allows traders to offset positions in one asset class with positions in another, potentially reducing overall margin requirements. While efficient, this practice can create contagion risk during a death spiral.

A sharp price decline in one asset (e.g. cryptocurrency) can trigger a margin call that forces the liquidation of assets in a completely different class (e.g. stock options) to cover the shortfall. This links otherwise disconnected markets, allowing psychological panic and forced selling to spill over and initiate new spirals.