Report by BCBS-CPMI-IOSCO analyses margin procedures during Covid market stress
29 September 2022 Global
Image: AdobeStock/Andrii Yalanskyi
BCBS, IOSCO and CPMI have published an evaluation of margin management practices in the face of uncertainties in financial markets with the onset of the COVID-19 pandemic in March 2020.
The Basel Committee on Banking Supervision (BCBS), the banking supervisory authority, alongside the Committee on Payments and Markets Infrastructure (CPMI) and the International Organization of Securities Commissions, have released their findings in a joint report published today, entitled Review of Margining Practices.
The study forms part of the Financial Stability Board’s (FSB’s) work programme to improve the resilience of non-bank financial intermediaries and analyses industry feedback provided on a consultation paper released by BCBS-CPMI-IOSCO in October 2020.
Reflecting on margin activity during the spike in market volatility during March-April 2020 and the corresponding dash for cash, the paper finds that initial margin (IM) requirements for centrally cleared markets rose by approximately US$300 billion during March 2020 relative to the preceding month, with an additional increase in excess collateral of US$115 billion.
This resulted in an increase in collateral pre-positioned at CCPs of more than US$400 billion, a 40 per cent increase on the average for February.
Variation margin (VM) calls in both cleared and non-cleared markets rose dramatically in March, with central counterparty VM calls rising from around US$25 billion to hit a peak of US$140 billion for 9 March 2020.
While CCP VM calls were predominantly end of day, the report highlights a significant rise in intraday VM calls during the high-stress period in March 2020. These were predominantly made according to predefined schedules, with some ad hoc VM calls made on days of particularly high volatility.
The report finds that IM requirements on non-cleared derivatives contracts remained relatively stable during this period of market stress.
Typically, intermediaries indicated in their consultation responses that they were relatively unaffected by changes in margin and made few changes to counterparty margin call procedures, although some reported making adjustments to counterparty credit limits.
On the back of the consultation, BCBS, CPMI and IOSCO have proposed amendments in six core areas and indicate that they will work with the FSB to carry out this work.
They identify a need for increased transparency in centrally cleared markets, particularly in the metrics and disclosure requirements related to procyclicality, model performance and responses to volatility.
This will be accompanied by measures to boost liquidity preparedness for market participants and to re-examine liquidity disclosures requirements.
Respondents highlighted a need to address data gaps in regulatory reporting obligations, particularly through work to identify gaps in regulatory data at the jurisdiction level and to provide a more detailed picture of firms’ level of preparedness to meet margin requirements.
Additionally, the paper recommends steps to streamline VM processes in both cleared and non-centrally cleared markets, leaving market participants better equipped to meet any large VM calls that might arise during periods of market stress.
International work is scheduled to evaluate the responsiveness of CCP margin models to volatility — and other types of market stress — and to assess and compare factors that may contribute to procyclicality under different market conditions.
This will be accompanied by parallel efforts to evaluate the responsiveness of non-centrally cleared IM models to market stress and their ability to ensure timely resolution of IM shortfalls.
The Basel Committee on Banking Supervision (BCBS), the banking supervisory authority, alongside the Committee on Payments and Markets Infrastructure (CPMI) and the International Organization of Securities Commissions, have released their findings in a joint report published today, entitled Review of Margining Practices.
The study forms part of the Financial Stability Board’s (FSB’s) work programme to improve the resilience of non-bank financial intermediaries and analyses industry feedback provided on a consultation paper released by BCBS-CPMI-IOSCO in October 2020.
Reflecting on margin activity during the spike in market volatility during March-April 2020 and the corresponding dash for cash, the paper finds that initial margin (IM) requirements for centrally cleared markets rose by approximately US$300 billion during March 2020 relative to the preceding month, with an additional increase in excess collateral of US$115 billion.
This resulted in an increase in collateral pre-positioned at CCPs of more than US$400 billion, a 40 per cent increase on the average for February.
Variation margin (VM) calls in both cleared and non-cleared markets rose dramatically in March, with central counterparty VM calls rising from around US$25 billion to hit a peak of US$140 billion for 9 March 2020.
While CCP VM calls were predominantly end of day, the report highlights a significant rise in intraday VM calls during the high-stress period in March 2020. These were predominantly made according to predefined schedules, with some ad hoc VM calls made on days of particularly high volatility.
The report finds that IM requirements on non-cleared derivatives contracts remained relatively stable during this period of market stress.
Typically, intermediaries indicated in their consultation responses that they were relatively unaffected by changes in margin and made few changes to counterparty margin call procedures, although some reported making adjustments to counterparty credit limits.
On the back of the consultation, BCBS, CPMI and IOSCO have proposed amendments in six core areas and indicate that they will work with the FSB to carry out this work.
They identify a need for increased transparency in centrally cleared markets, particularly in the metrics and disclosure requirements related to procyclicality, model performance and responses to volatility.
This will be accompanied by measures to boost liquidity preparedness for market participants and to re-examine liquidity disclosures requirements.
Respondents highlighted a need to address data gaps in regulatory reporting obligations, particularly through work to identify gaps in regulatory data at the jurisdiction level and to provide a more detailed picture of firms’ level of preparedness to meet margin requirements.
Additionally, the paper recommends steps to streamline VM processes in both cleared and non-centrally cleared markets, leaving market participants better equipped to meet any large VM calls that might arise during periods of market stress.
International work is scheduled to evaluate the responsiveness of CCP margin models to volatility — and other types of market stress — and to assess and compare factors that may contribute to procyclicality under different market conditions.
This will be accompanied by parallel efforts to evaluate the responsiveness of non-centrally cleared IM models to market stress and their ability to ensure timely resolution of IM shortfalls.
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