FIA highlights CCP margin procyclicality concerns to European Regulators

17 February 2021

Washington, DC--FIA today presented to the European Securities and Markets Authority (ESMA) on the issues experienced in the spring of 2020 when high volatility and procyclicality of margin requirements were experienced in the global clearing system. During this period, the high number and the large size of margin calls drove demand for liquid assets, just as those assets were scarce due to market stresses. Such a drive for liquid assets can contribute to the stress in the financial system. FIA's presentation consisted of an analysis of data on margin requirements at several major derivatives clearinghouses, and it contained a set of recommendations aimed at mitigating the procyclicality of margin requirements. FIA first issued these recommendations in a white paper published in October 2020. 

"The market turmoil triggered by the pandemic was a real-life stress test of the global clearing system," said Jacqueline Mesa, FIA's COO and global head of policy. "The clearing system passed this test and proved its resiliency during exceptional volume and volatility, but there are some important lessons to learn in certain areas. One of these areas is the procyclicality of margin requirements, which in a worst-case scenario could contribute to the overall stress in the financial system. We appreciated the opportunity to discuss this issue with the ESMA CCP Supervisory Committee and look forward to further discussions on this topic."

Among the highlights of FIA’s presentation today:

  • The market turmoil during the spring of 2020 offered a powerful real-world stress test of the financial markets.
  • The cleared derivatives markets withstood the test, proving that post-crisis reforms provided stability.
  • However, this episode provided an opportunity to review the clearing system and consider the potential for improvements.
  • FIA issued a paper in October reflecting upon lessons learned. These include:
    1. The steep and rapid increases in CCP initial margin requirements created funding pressures on FCMs and their clients, which contributed to the level of stress in the financial markets;
    2. Unscheduled intraday margin calls made it more difficult for FCMs to forecast their liquidity requirements, adding to the stress.
  • FIA's analysis of margin requirements was based on quarterly disclosures from nine major CCPs, which focused on initial margin. Variation margin flows were much larger, but those flows are two-way and therefore they have a less lasting effect on liquidity.
  • The aggregate amount of initial margin at these nine CCPs rose from $563.6 billion at year-end 2019 to $833.9 billion at the end of the first quarter in 2020. In other words, initial margin increased by $270.3 billion, or 48%, during that three-month period.
  • It should be noted that there were large differences among these CCPs, reflecting differences in asset classes and margin models.

The workshop was organized by ESMA's CCP Supervisory Committee as part of its examination of the performance of clearinghouses during the extreme volatility in the spring of 2020 and included presentations from several clearinghouses, industry groups, and experts from ESMA’s staff.

FIA’s white paper on margin sought to promote dialogue, like the one today, on the issue of procyclicality in clearinghouse margin requirements and makes several recommendations for improvements to margin models. Specifically, FIA called for:

  • improvements to the design and application of margin floors, one of the main tools for controlling procyclicality;
  • a framework for measuring the potential for large and sudden increases in initial margin and using those measurements in the calibration of margin levels;
  • changes to the way clearinghouses use intraday margin calls that would reduce funding pressures on clearing members;
  • and improvements to margin models that will make them more robust and dampen procyclical effects.

Today’s presentation and the white paper represent a continuing effort by FIA to enhance risk management in the clearing system. In 2015, FIA published a global CCP risk position paper and followed that up with a 2018 CCP risk management recommendations.

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