ESRB published a report on mitigating the procyclicality of margins and haircuts in derivatives markets and securities financing transactions. The report provides new analysis and sets out possible policy options to address systemic risks arising from the procyclicality associated with margin and haircut practices. ESRB is mindful that the implementation of these policy options would require further work and engagement with market participants and international fora. This report expands on the work of the 2017 report on the macro-prudential use of margins and haircuts.
ESRB is now placing greater emphasis on policy options aimed at reducing liquidity strains during times of market stress than on those that constrain the build-up of leverage during boom. The policy options in consideration are as follows:
- Pass-through, by central counterparties, of any intraday variation margin collected in the course of the same day
- Introduction of initial margin floors in both centrally and non-centrally cleared derivatives markets
- Reduction of risks of procyclicality in client clearing by limiting the discretion of client clearing service providers toward their clients
- Introduction of adequate notice periods to changes in collateral haircuts and eligibility
- Introduction of a cash collateral buffer for market participants active in centrally and non-centrally cleared derivatives markets
- Mandatory use of initial and variation margins as risk mitigation techniques in non-centrally cleared securities financing transaction markets
ESRB intends to perform further work to analyze the functioning and impact of these policy options. This could include an assessment of the policy options (potentially using new data sources), analysis of any side effects they may have, and a further assessment of interaction between the options and the existing regulations. Four of the options identified—the mandatory pass-through of intraday variation margin, initial margin floors, the strengthening of client clearing, and guidance on notice periods—would require changes to the regulatory framework for centrally cleared and non-centrally cleared derivatives. By contrast, introducing cash collateral buffers for entities engaging in derivatives transactions would require changes to the prudential rules that apply to banks, insurers, and other financial entities. The policy option on bilateral securities financing transactions, which is an extension of the globally agreed safeguards applied to derivatives transactions, would require the development of a new regulatory framework. In identifying these options, ESRB is mindful that further work and engagement with regulatory standard-setters and industry representatives is needed.
Keywords: Europe, EU, Banking, Insurance, Securities, Procyclicality, Derivatives, Securities Financing Transactions, Systemic Risk, CCPs, Initial Margin, Variation Margin, Haircuts, ESRB
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