Derivatives clearinghouses and their members once again debated margin-related issues on 10 November at an FIA Expo panel on how the global clearing ecosystem functioned during market volatility in 2020. This time, however, the two primary areas discussed were around strengthening initial margin floors for certain products and creating consistency and predictability for intraday margin calls – and on the latter issue, CCPs and their members found some common ground.
Lee Betsill, chief risk officer and managing director at CME Clearing, noted that "2020 has certainly been the most turbulent year for the markets in my career." He pointed out that CME experienced a number of historic moves across equity derivatives, U.S. Treasury and oil markets this spring. That volatility warranted a steep increase in margin levels, he said, stressing that the clearinghouse applied these changes through routine and transparent means to help minimize disruptions.
"The important point is that our response to the shift in the volatility regime was mindful of the role we play in the financial system," Betsill said. "We wanted to and were able to stick to our routine business-as-usual processes to protect market integrity. We gave 24 hours' notice to participants so they would have the ability to react to margin changes as it impacts their portfolios, and we stepped in the changes and didn't do it all at once."
Nevertheless, the unprecedented size of those margin changes created complications for clearing members and their customers, said Sarah Shore, executive director of prime services at Goldman Sachs. She noted that some margin requirements increased two to three times the typical level in a matter of weeks, straining liquidity for Goldman and its clients. To prevent the complications created by such significant changes in the future, she urged the industry to consider strengthening margin floors that would prevent collateral levels from rolling back in times of low volatility only to spike dramatically again in times of stress.
"The system proved resilient, but I don't think we should be complacent about how the system functioned or how the margin levels performed," Shore said. "I think there's a major lesson to be learned about the necessity around defined margin floors for each product."
The idea of margin floors was one of several key recommendations put forth by FIA in an October white paper that examined the dramatic increase in margin requirements at derivatives clearinghouses during the first quarter of 2020 due to increased market volatility related to the pandemic.
These floors could be important tools "to dampen the pro-cyclical affects that are created by maintaining low margin requirements because of periods of low volatility," Shore said, adding that the first half of 2020 will be "an invaluable data set" on the impact of volatility on margin and should thus be incorporated into minimum collateral requirements rather than be allowed to roll off lookback periods simply because a period of comparatively lower volatility emerges in the years ahead.
On the separate issue of intraday calls, Gert Ellerkmann, global risk governance and strategy specialist at ABN AMRO Clearing, said that the changes in variation margin requirements passing through his firm's books were very large. However, the bigger problem was that some of these margin calls came intraday or on an ad hoc basis, without much notice or structure, he said.
"If intraday calls were always scheduled at the same time and rules were very transparent about whether it's customary to add to initial margin or variation margin, that would help" during times of volatility, Ellerkmann said. He also added that while ABN AMRO experienced significant margin demands on an intraday basis, getting those posted funds back from some clearinghouses took a much longer settlement cycle.
"Sometimes the CCP asked us for collateral within an hour but getting it back would take a full day or even longer," Ellerkmann said.
Dale Michaels, executive vice president and financial risk manager at OCC, commented that clearinghouses and their members should move towards a consensus on this issue. He said that OCC places a rigid structure around its own intraday margin calls, considering it "just another settlement cycle" out of respect for its clearing members and to protect market integrity.
"This idea of intraday calls is a point where we are in agreement. At OCC, we have routine intraday settlement, done at the same time every day. We forecast projected settlements in advance," said Michaels. "The last thing you want to have from a CCP is a surprise during times of stressed market events."
CME's Betsill agreed, pointing out his firm's clearing operations also follow a routine and transparent intraday process for margin. He stressed that CCPs “should not be seen as hoarders of liquidity” and that returning collateral promptly to clearing members is an equally important part of protecting market integrity and being a good partner with clearing members.
Both CME and OCC also pointed out that neither clearinghouse performed any unscheduled or ad hoc margin calls during the elevated volatility of 2020.
Jackie Mesa, chief operating officer and senior vice president of global policy at FIA, said this is an area where the industry can rely on FIA to be "great partners" to improve the clearing ecosystem.
"I imagine that having these ad hoc calls that happen to your clearing members, even if CME and OCC are not performing them, that isn't ideal because it's putting strain on that clearing member that filters into your CCP operations too," Mesa said. "It would be great to work collectively to figure out what should be the global standard here. Clearly some CCPs are thinking about this in different ways."
For a full list of FIA's Expo conference programming, visit FIA.org/expo.
