A situation that is characterized by a rush by borrowers to get their collateral back from broker-dealers (the lenders). Such market players lend and borrow cash in secured transactions, using a certain chunk of that liquidity to fund their own asset holdings (assets held for their own accounts). Large borrowers, such as hedge funds, tend to repay collateralized loans on the very first signs of liquidity problems faced by broker-dealers (which may lead to default cases). This type of liquidity risk can arise irrespective of the proportion of haircuts (repo margin) that are designed, in the first place, to keep collateral value above loan notional.

Withdrawal of collateral by counterparties reduce a dealer’s liquidity position and, as a result, put its solvency at risk. Collateral runs are practically different from wholesale funding runs in that the former are triggered by a contraction in dealers’ asset holdings, while the latter is caused by a contraction in their liabilities.