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 apublished 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 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:
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.