BIS on Nexus Between Banks and Central Counterparties Amid Pandemic
BIS published a bulletin that examines the nexus between banks and central counterparties (CCPs) amid the COVID-19 pandemic. The bulletin highlights that when thinking about margining, central banks need to assess banks and CCPs jointly rather than in isolation. In the CCP-bank nexus, actions that seem prudent from the perspective of an individual institution have the potential to strain the stability of the entire nexus through interactions. For instance, increasing margin during market stress does address increased counterparty risk. However, it can put undue pressure on clearing member banks at the wrong time.
The COVID-19 pandemic led to market turmoil in mid-March. CCPs remained resilient, vindicating the post-crisis reforms that incentivized central clearing. The procyclicality of leverage embedded in margining models might have played a role in the events of mid-March. These margin models are critical because they underpin the management of counterparty credit risk. Margin models of some CCPs seem to have underestimated market volatility, in part because they have relied on a short period of historical price movements from tranquil times. These CCPs had to catch up and increase margins at the wrong time, squeezing liquidity when it was most needed. Going forward, the interaction of CCPs with clearing member banks is critical. Importantly, actions that might seem prudent from an individual institution’s perspective, such as increasing margins in a turmoil, might destabilize the nexus overall. Therefore, central banks and regulators need to assess banks and CCPs jointly rather than in isolation.
Related Links
Keywords: International, Banking, COVID-19, Initial Margin, Variation Margin, Procyclicality, Liquidity Risk, Counterparty Credit Risk, BIS
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Karen Moss
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
Previous Article
FED Updates Terms for Asset-Backed Securities Loan FacilityNext Article
Bundesbank Updates Validation Rules for ReportingRelated Articles
OSFI Issues Results of Pilot on Climate Risk Scenario Analysis
The Office of the Superintendent of Financial Institutions (OSFI) published an update on the discussion paper that intended to engage federally regulated financial institutions and other interested stakeholders in a dialog with OSFI, to proactively enhance and align assurance expectations over key regulatory returns.
EC Issues Regulation on Adjustments to K-Factor Coefficients Under IFR
The European Commission (EC) published a report summarizing responses to the targeted consultation on the supervisory convergence and the single rulebook in the European Union (EU).
ECB Issues Opinions on Green Bonds Standard and CRR Proposals
The European Central Bank (ECB) published its opinion on a proposal for a regulation on European green bonds, following a request from the European Parliament.
ESRB Explores Policy Response to Risks Arising from Digitalization
The Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) published a report that explores the expected impact of digitalization on provision of financial and banking services, and proposes policy measures to address the risks stemming from digitalization.
HKMA Consults on FIRO Code, Revises Policy on Foreign Exchange Risk
The Hong Kong Monetary Authority (HKMA) is consulting on the draft Financial Institutions (Resolution) Ordinance (Cap. 628), or FIRO, Code of Practice chapter on liquidity and funding in resolution, until March 14, 2022.
FI Publishes Multiple Regulatory and Reporting Updates
The Swedish Financial Supervisory Authority (FI) announced that the capital adequacy reporting as at December 31, 2021 must be done by February 11, 2022.
EU Authorities Address COVID-19 Reporting, MCD, and PSD2 Issues
The European Banking Authority (EBA) announced that the guidelines on the reporting and disclosure of exposures subject to measures COVID-relief measures shall continue to apply until further notice.
BSP Tackles Aspects of Lending and Islamic, Open & Sustainable Finance
The Central Bank of the Philippines (BSP) issued communications covering developments related to online lending platforms, open finance framework and roadmap, and on the expected regulations in the area sustainable finance.
US Agencies Issue Regulatory Updates, FDIC Launches Tech Sprint
The Board of Governors of the Federal Reserve System (FED) published the final rule that amends Regulation I to reduce the quarterly reporting burden for member banks by automating the application process for adjusting their subscriptions to the Federal Reserve Bank capital stock, except in the context of mergers.
EBA Issues Guide on Bank Resolvability, Consults on Transferability
The European Banking Authority (EBA) published its assessment of risks through the quarterly Risk Dashboard and the results of the Autumn edition of the Risk Assessment Questionnaire (RAQ).
