How Do Margin Calls Protect the Solvency of a Derivatives Exchange during Volatile Market Conditions?

Margin calls protect the exchange by ensuring that traders maintain sufficient collateral to cover potential losses. When a position moves against a trader, the exchange issues a margin call, demanding additional collateral to bring the account's equity back above the maintenance margin level.

If the trader fails to meet the call, the exchange automatically liquidates the position. This proactive management of collateral prevents the trader's loss from exceeding their margin and becoming a negative balance that the exchange must absorb, thereby protecting the exchange's solvency.