Washington, D.C.— FIA has responded to a discussion paper released by international standard setters that sets out eight "effective practices" for streamlining variation margin in centrally cleared markets. The discussion paper addresses the need for greater transparency and understanding of margin practices at central counterparties, particularly in light of recent episodes of market volatility triggered by the COVID crisis and Russia's invasion of Ukraine.
Central counterparties generally make calls for variation margin at the end of the day, but they can make intraday VM calls and often do so when markets are volatile. The members of the clearinghouses must fund the calls immediately, and during periods of market volatility, these calls can be very large.
For this reason, FIA has urged CCPs to provide more transparency and predictability into intraday margin calls. FIA recognizes that CCPs need the ability to call additional margin when markets become more volatile, but providing more transparency and predictability into their margin practices would allow their members to prepare more effectively for these calls, thereby reducing sudden demands for liquidity that can contribute to market instability.
This issue drew the attention of global regulators when market volatility associated with the COVID crisis triggered a “dash for cash” by financial market participants that needed to close out positions to meet their liquidity needs. The Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, and the International Organization of Securities Commissions published a general review of margin practices in 2022, and in April 2024 CPMI and IOSCO published a discussion paper focused specifically on streamlining variation margin.
In its response, FIA said it generally supports the effective practices outlined by CPMI and IOSCO, with specific recommendations aimed at further refining intraday margin processes and collateral management within CCPs. The response notes, however, that the practices are not enforceable, and urges international standard setters to consider establishing principles and/or standards for variation margin and intraday margin practices.
"We generally support these effective practices," Jaqueline Mesa, FIA’s chief operating officer and senior vice president of global policy, said in the response. "They promote transparency and predictability for market participants, timely consideration of sourcing liquidity, optimization of netting benefits and the eligibility of non-cash collateral. However, we believe that binding standards or principles could be established for variation margin and intraday margin practices."
Specific recommendations highlighted by FIA in the letter include:
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Scheduled and Unscheduled Intraday Margin Calls: FIA supports transparent and clearly defined scheduled intraday margin calls, made consistently and at reasonable hours, to enhance predictability for market participants. Unscheduled calls should be reserved for extreme market conditions or significant exposures, with clear triggers and thresholds communicated to all participants.
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Transparency Requirements: FIA stresses the importance of comprehensive transparency in CCP margin practices, including detailed breakdowns of calculations, netting arrangements, and availability of excess collateral. This transparency is crucial for participants to understand and manage their intraday margin obligations effectively.
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Establishment of Binding Standards: FIA recommends establishing binding standards or principles for VM and intraday margin practices to ensure consistency and enforceability across CCPs.
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Pass-through VM Model: FIA encourages the exploration of the pass-through VM model to enhance liquidity and risk management efficiency, provided that challenges related to fair valuation and liquidity sourcing are carefully considered.
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Collateral Management: FIA advocates for flexibility in collateral use, allowing non-cash collateral to cover intraday margin obligations and enabling the mobility of excess collateral across CCPs to optimize liquidity management.
FIA supports transparency in the derivatives clearing community and has published several papers over the past few years recommending CCP risk management best practices, including enhancing transparency. Most relevant are the recommendations and policy options published in a report from October 2020, Revisiting Procyclicality: The Impact of the COVID Crisis on CCP Margin Requirements, which covers intraday margin among other topics. The report provided several principles aligned with the effective practices identified in the CPMI-IOSCO discussion paper.
