13 March 2018

ESMA publishes the responses to its Consultation on Draft Guidelines on APC Margin Measures for CCPs

ESRB

The ESRB welcomes that the ESMA draft guidelines clarify how the EMIR tools on margin requirements should be applied. ESRB states that the provisions in Article 28(1) of RTS 153/2013 do not provide sufficient guidance on applying the three measures to limit the procyclicality of margin requirements. It was therefore concluded that the existing framework should be improved and include clear guidance on the parameters to be used by CCPs when calculating the margin requirements. This would ensure consistent application across CCPs and that the provisions do not result in insufficiently low margin levels. The ESRB is supportive of the ESMA draft guidelines for the application of the procyclicality-limiting tools regarding CCP margin requirements.

The ESRB welcomes ESMA’s proposal to enhance transparency for clearing participants by requiring CCPs to publish information on their margin models. The ESRB welcomes the proposals in the ESMA draft guidelines, which would require CCPs to publish the parameters (and other information) of the models they use for computing margin requirements. These would enable clearing participants to better anticipate and manage liquidity strains which could be caused by unexpected margin calls.

Full ESRB response

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Eurex Clearing

The impact on the liquidity of a market participant caused by initial margin revisions in a period of increased market volatility is a valid consideration. However, the effects of a change in initial margin is dwarfed by the liquidity needs arising from variation margin payments (intra-day and daily collateralization). Eurex notes that while initial margin pro-cyclicality receives a lot of attention at a European level, the liquidity impacts of variation margin payments in an event of market stress is a less researched and less harmonized topic, despite its key role in liquidity manage-ment.

In the view of Eurex Clearing, the most appropriate steps to mitigate adverse effects of pro-cycli-cality are:

 an outcome-based approach where outcome measures are clearly aligned with explicit regulatory goals

 regulatory harmonization of outcome-based measures at a global level

 public disclosure of harmonized key metrics allowing transparency for both market par-ticipants and all regulatory bodies

The first step in such strategy would be an alignment on which measures are most relevant from a regulatory point of view in the sense of addressing a specific regulatory goal. Eurex Clearing would support for reporting of such measures to be incorporated into revised CPMI-IOSCO public quantitative disclosure (PQD).

Full Eurex Clearing response

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London Stock Exchange Group

LSEG believes that clear and documented measures to avoid pro-cyclical effects should be part of a proper risk management framework, being a core tool to avoid big step margin changes with further drain of resources on participants during periods of market stress. CC&G has included the assessment of procyclicality of margin in its internal Model Validation.

As a general comment, LSEG would like to point out that the use of conservative confidence levels, holding periods and long time series acts as anti-cyclical measure ensuring a higher level of stability in margin requirement during period of stressed market.

LSEG acknowledges the need of defining a policy setting out the circumstances under which the buffer could be temporarily exhausted. We suggest that each CCP should draft a policy which shall define some ranges for market indicators of each relevant market that signal the need to consider taking action on the applied buffer. In this context, it is important that such policies do not introduce a thoughtless number of arbitrary parameters, but rather a set warning thresholds or ranges.

Full LSEG response

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LCH Group

LCH supports the need to have clear guidelines that limit the procyclicality of margining requirements and ESMA’s work in this area.

LCH understands that the ESMA guidelines are limited to margining requirements to limit procyclicality as they relate to Article 28 of Commission delegated regulation No 153/2013 of 19 December 2012 (the ‘RTS’). However, LCH would like to point out that this focus of the scope and content of the guidelines does not allow addressing the various sources of procyclicality that LCH has observed and identified. In particular, LCH has observed and identified several sources of procyclicality beyond those described in Article 28 and there is a risk that the guidance limited to margining requirements does not address several important sources of procyclicality.

Specifically, LCH has identified the following key sources of procyclicality within a CCP that do not seem to be addressed in the guidance:

Margin models

Default Fund contributions

Collateral eligibility

 So-called “Credit multipliers” which are applied in the event of a slippage in a member credit quality

Unfunded assessments, which may be called in the event that the funded resources do not prove sufficient to cover a clearing member default.

There are also considerations coming from product specific characteristics. For example, repo contracts can involve physical settlement risk and this is not present for financially settled products such as interest rate derivatives.

Consequently, CCPs might develop metrics and thresholds that cover a wider scope than those proposed in this consultation and these would likely differ between CCPs due to the potential sources of procyclicality contributing different degrees of procyclical risk.

Full LCH Group response

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Consultation Paper