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For example, the additional US$ 300 BN of initial margins (IM) called during the Covid Crisis in March 2020 contributed to a “dash for Cash”1, which even affected the US Treasury market.
CCPs allow market participants to manage and reduce counterparty and liquidity risks. In this respect initial margins are key to protect a CCP against the potential future exposure that a CCP could face in case of a clearing member default. Understanding how initial margin models work is crucial for market participants to predict their liquidity needs and reduce liquidity risk.
Summarizing our recently published ECB Occasional Paper, we present a current picture of initial margin models in Europe. We find that initial margin model frameworks vary significantly, depending on past choices and the products cleared by CCPs, while pointing towards a trend to adopt Value-at-Risk (VaR) frameworks for initial margin calculation purposes. We conclude by highlighting current and upcoming challenges and risks to CCP initial margin model frameworks.
To quantify and assess risks CCPs rely notably on initial margin (IM) models which are key to protect a CCPs from a clearing member default event. In Europe, CCP risk management frameworks are regulated via the European Market Infrastructure Regulation (EMIR)2. Additionally, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have shared global expectations on CCP margin models which are also relevant for all European CCPs3.
Figure 1: Schematic overview of the European regulatory framework for IM models
Sources: Authors’ illustration.
Although this regulatory framework establishes a range of minimum requirements, specific rules for initial margin models remain largely principle-based, with the underlying assumption that CCPs are in the better position than regulators to understand the risks of their clearing members and products4. Consequently, IM model framework vary significantly across CCPs although they can roughly be subdivided into two major categories: Standard Portfolio Analysis of Risk (SPAN)5 and Value at Risk (VaR) models6.