On 29 September 2022, the Basel Committee on Banking Supervision (Basel Committee) published a report concerning a review of margining practices.
In non-centrally cleared markets, the Basel Committee and the International Organisation of Securities Commissions (IOSCO) developed a framework that established minimum standards for margin requirements for non-centrally cleared derivatives (although not non-centrally cleared securities). These reforms were designed to reduce systemic risk in non-centrally cleared derivatives markets and to help promote central clearing.
During the period of high market volatility in March 2020, large increases in aggregate margin requirements were seen in both the centrally and non-centrally cleared markets. The Covid-19 pandemic and its market impact thus presented a real-world test of derivatives and securities markets’ operation in the context of this episode’s broader liquidity pressures.
The report presents analysis undertaken by an ad hoc group established by the Basel Committee, the Committee on Payments and Market Infrastructures (CPMI) and IOSCO – as part of the Financial Stability Board’s (FSB’s) work programme on non-bank financial intermediation (NBFI) – examining where and, if so, to what extent, margin calls were unexpectedly large in centrally cleared and non-centrally cleared derivatives and securities markets. The report considers both initial margin (IM) and variation margin (VM), as well as centrally and non-centrally cleared markets (including clearing member-client dynamics), margin practices transparency, predictability and volatility. It also considers the liquidity management preparedness of market participants to meet margin calls and the availability of each jurisdiction´s regulatory data.
The Basel Committee, CPMI and IOSCO believe that further work is necessary in the following areas:
- Increasing transparency in centrally cleared markets with further international work being proposed to explore consistent metrics and disclosures concerning procyclicality, responsiveness to volatility and model performance.
- Enhancing the liquidity preparedness of market participants as well as liquidity disclosures. Additional international work could identify ways to further enhance liquidity
preparedness, including appropriate liquidity measures in the NBFI sector, and elucidate ways that clearing members can encourage and facilitate greater liquidity preparedness on the part of clients.
- Identifying data gaps in regulatory reporting which could provide a more comprehensive picture of the preparedness of market participants for margin requirements.
- Streamlining VM processes in centrally and non-centrally cleared markets. International work is proposed to consider ways to foster market participants’ preparedness for the large VM calls that can occur during market stress through efficient collection and distribution of VM and other means.
- Evaluating the responsiveness of centrally cleared IM models to market stresses with a focus on impacts and implications for CCP resources and the wider financial system. Further international work would seek to understand the degree and nature of CCP margin models’ responsiveness to volatility and other market stresses and explore appropriate ways to analyse, compare and set baseline expectations as to procyclicality in various settings.
- Evaluating the responsiveness of non-centrally cleared IM models to market stress. International work would 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 IM shortfalls and the level of disclosure on the performance of non-centrally cleared IM models.