Last week on the 11th May, the Bank for International Settlements (BIS) released a new bulletin of its Covid-19 series: “The CCP-bank nexus in the time of Covid-19”. The paper highlights the necessity by central banks to assess CCPs and banks jointly rather than in isolation when thinking about margining.
In the report, the authors reconsider the systemic implications of the current margin model, given the sharp jump in margin calls during the recent market turmoil: “As market volatility and trading increased in March, CCP deposits at the Federal Reserve more than tripled within a month. From end-February to end-March, they grew from around US$ 70 billion to more than US$ 270 billion. This most likely reflects the increasing amount of IM pledged by clearing members.”
One of the key takeaways is the link between the liquidity squeeze seen in March and the procyclicality embedded in margining models. The report notes that IM models that rely on a short look-back period are more likely to be procyclical, as volatile periods might drop out of the data set. These margin models are critical because they underpin the management of counterparty credit risk, but they can put undue pressure on clearing members banks at the wrong time. Therefore, the authors advocate for a trade-off in margin setting guidance as a way to absorb further shocks and to reduce systemic risk, as “the liquidity squeeze for clearing member banks could be particularly harmful to corporates and households relying on banks for funding.”
The paper also observes that “CCPs remained resilient [during the market turmoil], vindicating the post-crisis reforms that incentivized central clearing.”
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