Global financial regulators are contemplating reforms to address the rise in margin calls that accompanied financial market turmoil in March 2020, as the pandemic first hit.
According to a joint report from the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO), the onset of the pandemic was followed by “a broad and rapid increase in margin calls across the financial system.”
Centrally cleared initial margin rose by about US$300 billion in March 2020, while non-centrally cleared initial margin remained relatively stable, that report said.
Despite the increase in margin pressure, “Financial markets generally proved resilient, with no widespread concerns about counterparty credit risk,” the report said.
In part, the financial system weathered the turmoil due to regulatory reforms that were adopted in response to the financial crisis of 2008 in order to reduce systemic risk.
As the report said, “The Covid-19 market turmoil of March 2020 was the most significant test of the resilience of financial markets since the great financial crisis.”
Nevertheless, the report also identified several possible areas for reform, including: increasing transparency in centrally cleared markets; enhancing firms’ liquidity and liquidity disclosure; and identifying gaps in regulatory reporting. It also recommended reviewing the operation of margin models in stressed markets.
The report is out for consultation until Jan. 12, 2022, after which standards setters will deliver a final report with reform recommendations.