BIS committees have teamed up to share collective insights on initial margin calculations and future requirements for centrally cleared transactions.
The Basel Committee on Banking Supervision (BCBS), International Organisation of Securities Commissions (IOSCO), and the Committee on Payments and Markets Infrastructure (CPMI) from the Bank for International Settlements have put together eight suggestions to enhance the resilience of central clearing systems.
The report, titled, “Transparency and Responsiveness of Initial Margin in Centrally Cleared Markets: Review and Policy Proposals,” builds on a previous publication, the BCBS-CPMI-IOSCO Review of Margining Practices, from September 2022.
The first four recommendations tackle challenges during stressful periods that might disrupt the smooth exchange of variation margin. Firstly, the paper suggests, banks and market intermediaries should actively tackle operational and legal hurdles that could hinder the smooth exchange of margin and collateral calls during stress periods.
Secondly, to ease liquidity concerns and prevent a “dash for cash,” firms are advised to consider flexibility in acceptable collateral types within the Working Group Margin Requirement (WGMR) Framework and national regulations, with appropriate haircuts.
Thirdly, the regulators have suggested embracing standardisation and automation in non-centrally cleared margin processes which can reduce frictions and operational delays; potentially enhancing collateral utilisation, especially in stressful situations.
Lastly, firms are urged to assess the potential benefits of third-party services in improving non-centrally cleared variation margin processes, considering their capabilities and ensuring proper risk management for outsourced services.
The other four recommendations highlight good practices for market users to smoothly implement initiatives to ensure the calculation of initial margin is consistently adequate for market conditions.
The regulators propose that supervisors should monitor whether these developments are sufficient to make this model responsive enough to extreme market shocks.
This document, circulated by BCBS, IOSCO, and CPMI, is currently open for public consultation, and industry stakeholders are invited to provide feedback by 16 April 2024.