In a series of reports, global policymakers set out proposals designed to improve transparency and the operation of margin requirements in global financial markets.
A trio of global policy groups — the Basel Committee on Banking Supervision, the BIS Committee on Payments and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO) — published a set of reports on margining practices. The groups aim to address fragilities that were exposed by the disruption in financial markets that accompanied the onset of the pandemic in early 2020.
At the time, initial margin requirements jumped by about US$300 billion in centrally cleared markets, and variation margin calls jumped by about US$140 billion, with wide variances between asset classes, the groups noted in their initial report on the episode, which was published in 2022.
“Given the rapid increases in market volatility experienced in March 2020, there was a broad-based and rapid increase in margin calls across the financial system,” that report noted.
In turn, these large, sometimes unpredictable margin calls created liquidity issues for some market players — and central banks were forced to intervene to guard against fire sales on certain assets.
Today, policymakers issued final reports that set out their recommendations, and detail best practices, that aim to improve the transparency and predictability of margin requirements, and to streamline margining processes to prevent systemic risk in future episodes of market stress.
“The proposals seek to aid market participants’ and regulators’ understanding of initial margin requirements and responsiveness through increased transparency,” the groups said in a release — adding that industry standards setters “will consider how best to implement the proposals.”
They also provided guidance to financial market infrastructure firms, such as exchanges, clearing and settlement firms, that aim to help ensure that market players have adequate liquidity to deal with larger-than-usual margin calls. In addition, they issued recommendations for streamlining margin processes in non-centrally cleared markets.
“These reports should be read together as elements of a comprehensive approach to improving transparency, streamlining margin processes, increasing the predictability of margin requirements and improving the liquidity preparedness of non-bank market participants for margin calls,” the groups said.
“The BCBS-CPMI-IOSCO margin group, by focusing on detailed data from a broad set of global regions, was able to sift between market rumours and reality, and achieve a balanced and pragmatic set of policy conclusions for implementation,” said Richard Haynes, deputy director, division of clearing and risk, at the U.S. Commodity Futures Trading Commission (CFTC), in a release commenting on the policymakers’ work.