BIS and IOSCO Report on CCP Margin Requirements During Market Volatility
Commentary by Steven Lofchie
The Bank for International Settlements (in particular, the Basel Committee on Banking Supervision and the Committee on Payments and Market Infrastructures) and IOSCO reported on margin dynamics in centrally cleared commodities markets in 2022. The report shed light on central counterparties' ("CCPs") decision-making processes regarding margin requirements and risk management practices during elevated market volatility.
Based on survey data, BIS and IOSCO found that CCPs use models designed to respond to elevated market volatility that is adaptable during periods of stress. The authors state that CCPs are sensitive to the impact of margin on market participants and incorporate mitigation measures against procyclicality of margin calls by (i) utilizing hard or soft targets for initial margin ("IM") increases or (ii) implementing "anti-procyclicality" tools.
BIS and IOSCO pointed out that IM calls by CCPs during periods of unexpected volatility may be substantial, noting:
- After the start of the war in Ukraine, IM requirements increased substantially for some U.S.-based commodities futures contracts. The IM requirements tripled for the primary wheat benchmark. IM requirements quintupled for the Henry Hub contract and increased by a factor of 600 for the Dutch TTF contract, as compared with January 2020.
- Intraday-cleared IM calls can be the most unpredictable; the thresholds for intraday calls can often differ across CCPs and clearing members. It was reported that these calls were often hard to understand, as intraday calls are commonly based on the aggregate call across all accounts at a clearing member (which a single end-user client would not know) and not simply calls on individual accounts.
Commentary
The size of the increase in the initial margin requirements may serve to demonstrate the fact that central clearing is being somewhat oversold. The clearing organizations may protect themselves by demanding more margin in a period of market volatility, but that additional margin has to come from somewhere.
It would be interesting to know how market participants dealt with the demands for more margin; specifically, were they forced to liquidate the relevant positions, or other positions, in order to meet the margin calls? If so, did such sell offs either further increase volatility or the relevant price movement, or did the sell offs impact the markets for other assets.