Global Regulators Propose Policies on Initial Margin in Centrally Cleared Markets

The Basel Committee on Banking Supervision ("BCBS"), the Committee on Payments and Market Infrastructures ("CPMI") and the International Organization of Securities Commissions ("IOSCO") published final policy proposals aimed at improving transparency and responsiveness in centrally cleared markets. The proposals conclude their multi-phase review of margining practices.

The Phase 2 report detailed ten policy proposals aimed at improving risk management and transparency for initial margin ("IM") models:

1. Margin Simulation Tools: CCPs should provide margin simulation tools to clearing members ("CMs") and their clients, including prospective participants, to calculate margin requirements for stress test scenarios, historical stress events and hypothetical portfolios. These tools should reflect all material components of the CCP's quantitative methodologies.

2. Disclosures in Margin Models: CCPs should disclose material aspects of their margin models to enable CMs and clients to understand key parameters, including the logic behind add-on charges, calibration of risk factors (e.g. lookback periods, liquidation horizons) and anti-procyclicality tools.

3. Public Quantitative Disclosures: CCPs should enhance public quantitative disclosures by providing detailed breakdowns of total margin requirements, backtesting results, variation margin splits by service and currency and measures of IM responsiveness.

4. Standardized IM Responsiveness Metrics: CCPs should compute and disclose standardized measures of IM responsiveness for key contracts in each clearing service, with daily data made available to regulators for monitoring purposes.

5. Governance for Discretionary Overrides: Governance frameworks should be established for CCPs to oversee the use of discretion (e.g. overriding model-calculated IM). This includes ex-post reviews, clear thresholds for overrides and full transparency with relevant authorities and impacted CMs.

6. Communication with Authorities on Overrides: CCPs should report aggregate size, duration and qualitative explanations of manual overrides to authorities. Affected CMs should also receive clear explanations.

7. Risk Committee Involvement: CCPs should seek input from market participants, including risk committees, when designing or amending analytical frameworks for monitoring IM models and performance.

8. Client Margin Transparency: CMs should ensure clients understand margin calculations, particularly when client margins deviate from CCP-calculated amounts. This includes facilitating access to CCP disclosures and providing detailed explanations for deviations.

9. Notification of Margin Adjustments: CMs should notify clients promptly about margin recalibrations, including triggers or thresholds for adjustments. In stress scenarios, CMs may retain discretion to adjust margins quickly.

10. Cross-CCP Exposure Disclosure: CMs should provide CCPs and regulators with information on their exposures, potential losses and liquidity needs across multiple CCPs to enhance systemic risk oversight.

These proposals follow analysis conducted during Phase 1, which involved quantitative and qualitative data collection from CCPs, clearing members and other market participants. The regulators consulted on these findings in early 2024 and incorporated feedback to refine their recommendations. The regulators stated that "the relevant standard-setting bodies will consider how best to implement the proposals."