On 8 January 2021, the ISDA published a paper on COVID-19 and CCP risk management frameworks.
The paper is based on the feedback that the ISDA Clearing Member Committee received from central counterparties (CCPs) and how their risk management frameworks reacted to the pandemic. The ISDA found that CCPs have dealt with the pandemic well although some issues have emerged including procyclical initial margin (IM) requirements exacerbating market stress at certain points and clearing members lacking timely information about back testing breaches and procyclicality in margin models. The paper contains recommendations to address both of these points.
The ISDA Clearing Member Committee recommends that anti-procyclicality (APC) tools are calibrated to ensure margin increases in response to volatility are less extreme in the future. The paper also recommends greater transparency of CCP models to enable predictability of margin levels during benign and stressed markets for clearing participants. This would include what APC measures the CCP adopts. A standard for the measurement of procyclicality in CCP models should also be introduced, enabling the ratio between margin in stressed versus normal times to be measured in a common way.
The ISDA Clearing Member Committee also notes that public quantitative disclosures published by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions are produced by CCPs on a quarterly basis with a lag of another quarter. As a consequence, participants had to wait until late June / early July 2020 for information from March 2020. Information for April was reported five months later. The paper recommends that the frequency of these disclosures should be increased, at a minimum, for essential data points like IM, default fund contributions and back testing breaches to monthly disclosures.