Three regulatory bodies have published a consultation paper on 10 policy proposals designed to boost the resilience of central clearing during periods of market stress, including through improvements to governance frameworks by CCPs. Joe Midmore, global head of strategy and sales at Cassini, spoke to BEST EXECUTION on the benefit to regulators of CCPs sharing information relating to their margining models, and how access to margin related analytics can help manage liquidity requirements.Â
The paper, Transparency and Responsiveness of Initial Margin in Centrally Cleared Markets: Review and Policy Proposals, was authored by the Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructures (CPMI) and International Organisation of Securities Commissions (IOSCO), and builds on a prior review of margining practices released in September 2022. The report proposes that central counterparties (CCPs) should provide additional public disclosures on their margin models and increase the sophistication and accessibility of margin simulation tools.
Joe Midmore, global head of strategy and sales at Cassini, told BEST EXECUTION that while the ‘benefit’ of sharing information relating to margining models is marginal to CCPS, “from a regulator’s perspective, better educated clearing members and clients theoretically improves the level of industry preparedness ahead of unexpected future market events”.
Midmore added: “Clients of clearing members typically receive limited reporting i.e. on an overnight basis only. Having access to margin related analytics on a near real-time basis with built-in forecasting and stress testing views will help clients of clearing members proactively manage their liquidity requirements.”
The paper hopes to enhance market participants’ understanding of centrally cleared initial margin calculations and potential future margin requirements, proposing that a central clearing counterparty (CCP) be more transparent regarding information relating to margining models, and disclose quantitative risk measures on a more frequent and timely basis. The proposals cover CCP simulation tools; CCP disclosures; measurement of initial margin responsiveness; governance frameworks and margin model overrides; and clearing member transparency.
When overriding margin model requirements, CCPs should do so within a publicly-disclosed analytical and governance framework, the report recommends, as well as taking steps to improve these analytical frameworks designed to evaluate responsiveness when passing margin calls on to clients.
Other recommendations emphasise good practices to implement initiatives that ensure the calculation of initial margin in line with optimal market conditions.
BCBS, CPMI and IOSCO have requested industry feedback by 16 April 2024. Two further reports — Streamlining Variation Margin Processes and Initial Margin Responsiveness of Margin Models in non-Centrally Cleared Markets and Streamlining Variation Margin in Centrally Cleared Markets: Examples of Effective Practices — are in development and set for release shortly.
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