The rush by cash borrowers (collateral providers) to withdraw their securities posted as collateral to a dealer (broker-dealer) through deals involving collateralized financing (securities financing transactions, SFTs). Cash borrowers tend to withdraw their securities on the very initial signs of default risk (default by dealers), which may turn more valuable than the amounts owed by such borrowers. The incentive to withdraw collateral increases with the extent of overcollateralization in the borrowing transaction.

In repo markets, margin spirals, for liquidity creation purposes, would require additional amounts of collateral (equivalent to an increase in repo margins/ haircuts) because of simultaneous increase in the level and volatility of discount rates. As discount rates increase, pressure piles up on prices, while increased volatility of discount rates leads to an increase in repo margins (following a drop in after-cash collateral values). In turn, higher repo margins depresses liquidity transformation, and as a result higher funding costs.

Margin spirals (haircut spirals) are also referred to as collateral runs.