Brokerage operations
Stop-out rules for institutional counterparties
Retail brokers have had automatic stop-out for decades. Firms that extend margin to other businesses often still rely on a dealer noticing an account in trouble and making a phone call. That works until the night it does not, and the gap between a margin call and a loss is usually measured in minutes.
Why institutional accounts are different
A counterparty account is larger, more concentrated and more likely to hold positions across several asset classes than a retail one. It may also be in a different base currency. Applying a retail stop-out rule unchanged tends to be either too aggressive, closing positions a sophisticated client was about to fund, or too lenient, leaving a large deficit when markets gap.
Staged levels, not a single line
Good margin policy uses at least three levels, each with a different consequence. The point of the first two is to give the counterparty and the desk time to act before the third does it for them.
A warning level that notifies the counterparty and the desk and changes nothing else
A restriction level that refuses orders adding exposure while still accepting reducing ones
A stop-out level at which the hub begins closing positions on its own
Deciding what gets closed first
Once stop-out starts, the order of closure matters. Closing the largest loss first stops the bleeding fastest. Closing the largest margin consumer first frees the most margin per order. Closing everything at once is simplest and most brutal. Whichever is chosen, it should be written into the account's policy and visible to the counterparty before it is ever used.
Partial closure, where positions are closed one at a time until the margin level recovers, usually preserves more of the client's book and more of the relationship. It also produces a clearer record of why each position was closed.
Records that settle disputes
A counterparty whose positions were liquidated will ask what happened, and the answer has to be better than a dealer's recollection. Each step should be logged: the margin level, the price, the order sent, the fill received and the margin level after. Notifications sent along the way belong in the same record.
Liquidation orders should also pass through the normal routing and execution rules. A stop-out that fills at a price the hub chose, rather than the market, invites exactly the dispute the record is meant to prevent.
In short
What to take away
Manual margin calls are too slow for institutional exposure
Use warning, restriction and stop-out levels with different consequences
Agree the close-out order in advance and prefer partial closure
Log every step and route liquidation orders like any other order
Read next
Watch a stop-out run end to end
We will push a test account through warning, restriction and stop-out so your risk team can read the record it leaves behind.