Three global standard-setters launched a joint consultation that reviews the margining practices during the COVID-19 pandemic and identifies potential areas for further policy work. These global standard-setters are the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO). The consultative report looks at margin calls in March 2020 and April 2020; margin practice transparency, predictability, and volatility across various jurisdictions and markets; and liquidity management preparedness of market participants. This consultation is part of the Financial Stability Board work program to enhance resilience of the non-bank financial intermediation sector. The comment period on this consultation ends on January 12, 2022.
Based on surveys of central counterparties, clearing members and broker-dealers, clients and regulatory authorities, and other data analyses, the report finds that variation margin calls in both centrally and non-centrally cleared markets in March were large and significantly higher than in February 2020. The peak central counterparty variation margin call was USD 140 billion on March 09, 2020. The report also finds that initial margin requirements for centrally cleared markets increased by roughly USD 300 billion over March 2020 and varied substantially across, and within, asset classes. However, the initial margin requirements on non-centrally cleared derivatives remained relatively stable during the stress period. Drawing from this analysis, the report proposes six potential areas for further work to inform policy considerations:
- Increasing transparency in centrally cleared markets. Further international work is proposed to explore consistent metrics and disclosures on procyclicality, responsiveness to volatility, and model performance. This work should also consider good practices with respect to the provision of tools and simulators. Additional work could also consider the role that disclosure of modeling choices by individual central counterparties could have in enhancing the understanding of, and comparisons among, the central counterparty model behavior. This further work should include exploration of improvements to the existing expectations for disclosures both to the clearing members and the public.
- Enhancing liquidity preparedness of market participants and liquidity disclosures. Additional international work could identify ways to further enhance liquidity preparedness, including appropriate liquidity measures in the non-bank financial intermediation sector, and elucidate ways that clearing members can encourage and facilitate greater liquidity preparedness of clients. Work could include analysis of the non-bank financial intermediation sector liquidity arrangements and intermediaries’ provision of liquidity to clients, to facilitate the fulfilment of margin obligations, and the effectiveness of those arrangements during periods of extreme stress or volatility.
- Identifying data gaps in regulatory reporting. Further international work is proposed to identify gaps in regulatory data at the jurisdictional level, in an effort to provide a more comprehensive picture of the preparedness of market participants for margin requirements. This work could consider what additional regulatory disclosures or data points could provide authorities with a fuller picture of the non-bank financial intermediation sector preparedness and intermediaries’ provision of liquidity to clients.
- Streamlining variation margin processes in centrally and non-centrally cleared markets. Work is proposed to consider ways to foster preparedness of market participants for the large variation margin calls that can occur during market stress through efficient collection and distribution of variation margin and other means. Additional work is also proposed to identify good practices for variation margin collection and distribution by central counterparties.
- Evaluating responsiveness of centrally cleared initial margin models to market stresses. Work is proposed to understand the degree and nature of central counterparty margin models’ responsiveness to volatility and other market stresses and to explore appropriate ways to analyze, compare, and set baseline expectations on procyclicality in various settings. Additional work could also review initial margin levels in non-stress times in the light of this responsiveness, including a review of the effectiveness of tools that lessen the procyclicality of margin models and the consistency of their use as well as the role of clearing members’ practices when passing on central counterparty margin calls to clients in dampening or amplifying the procyclicality of margin.
- Evaluating responsiveness of non-centrally cleared initial margin models to market stresses. Work could look into the timeliness of mechanisms for taking into account stress periods in the calibration of internal models as well as the timely remediation of initial margin shortfalls and the level of disclosure regarding the performance of non-centrally cleared initial margin models.
Comment Due Date: January 12, 2022
Keywords: International, Banking, Securities, COVID-19, Margin Calls, Initial Margin, Variation Margin, CCP, NBFI, Disclosures, Derivatives, Reporting, Basel, BCBS, CPMI, IOSCO
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