In February this year, the Basel Committee on Banking Supervision (BCBS), Committee on Payment and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO) published a discussion paper on streamlining variation margin (VM) in centrally cleared markets. Now, the Futures Industry Association (FIA) has responded to the paper, expressing support for the first seven of the eight proposed effective practices.
The original paper by the BCBS, CPMI, and IOSCO was motivated by international crises such as COVID-19 and the Russian-Ukraine war. These events “highlighted the need for clearing participants to better understand CCPs’ margin practices globally”, writes FIA. However, while it acknowledges that “the use of intraday margin call is an important tool for CCP risk management”, the practice can also “put significant pressure on clearing members and their clients to source and deliver the appropriate collateral in a short period of time”. The issue is exacerbated if the calls are made late in the day or not scheduled.
In addition, the FIA wishes to highlight the “destabilising liquidity impact from the current asymmetry between CCPs requiring collateral within a short period of time (typically within an hour) while clearing members receive their collateral from CCPs on a much slower time frame (typically on the next day)”.
Better standards
As for suggested improvements, the association comments that the proposed practices “seem to be limited in terms of their enforceability” and do not “promote the establishment of binding standards”. Having set standards “could be of benefit to market participants especially in periods of stress when consistency of implementation across CCPs would be extremely valuable”.
Limitations due to differences between CCPs, the products they clear, and operational considerations “should not hinder the establishment of VM and intraday margin best practices and standards”.
Furthermore, FIA believes that “there are various VM processes which CCPs have established under different terminology which could benefit standardisation”. CCPs also “use different VM processes for different purposes”. Further transparency in these purposes “would be extremely valuable” in helping clearing participants manage margin calls.
Further assessment
In general, the association supports all recommendations put out in the original paper, except for the last, which suggests that clearing members provide their clients with better transparency regarding their processes and the timing of intraday VM calls. According to FIA, “this effective practice is already generally met by clearing members”. The feedback that led to this recommendation came from just three clients, which might not be a “fair representation”. Further assessment of this requirement should thus be considered.
