Coming on the heels of policy proposals for enhancing margining in centrally cleared markets, global regulators issued new guidance Wednesday on margin practices in non-centrally cleared markets.
In a joint report, the International Organization of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision set out a series of recommendations that aim to address the markets’ functioning amid extreme stress.
According to the report, the regulators concluded that the margin-related issues that arose during recent periods of extreme volatility — such as the market shock that accompanied the onset of the Covid-19 pandemic in March 2020 — were driven by financial firms’ implementation of the existing requirements in this area, rather than the details of these policies themselves.
As a result, the regulators’ recommendations focus on enhancing adherence to these standards instead of revising the standards.
“The recommendations address challenges that could inhibit a seamless exchange of margin and collateral calls in stress periods,” the regulators said.
Among other things, they call on firms to “address operational and legal challenges” that could disrupt margin and collateral exchange in stressed markets, such as considering greater flexibility in accepting non-cash collateral to help ease the “dash for cash” that has occurred during recent episodes of market stress.
The proposed recommendations also encourage increased automation and standardization of margining processes, and highlight the need for adequate operational risk management, particularly when third-party service providers are used.
Additionally, the report highlights good practices for ensuring that margin calculations are consistent with prevailing market conditions, and calls on regulators to monitor the responsiveness of standard margin models to extreme market shocks.
The regulators are seeking feedback on their recommendations by April 17.