The main challenge of measuring clearing volumes is the variety of different products cleared by a CCP. While volumes for cash products are straightforward to calculate, those relating to derivatives require deeper analysis. Policy initiatives are underway to make margin requirements more predictable, and processes smoother, helping non-bank market participant optimise their liquidity reserves better.
Read also the other article: “Here’s our ranking of Europe’s CCPs by size”.
One example of the intricacies is the distinction between OTC derivatives gross and net notional, which is explained by the Commodity Futures Trading Commission (CFTC) here.
On the question of whether there is a standard formula for measuring the cleared volume of the main classes of derivatives, it is evident that cleared volumes are most commonly expressed in notional terms.
However, notional values may express different quantities depending on the type of the derivative. ESMA’s guidelines for reporting under EMIR explore the issues around reporting at position level (page 46) and price, notional and quantity fields (page 78) in some depth.
Article 5 of the EU’s “regulatory technical standards specifying the minimum details of the data to be reported to trade repositories and the type of reports to be used” (link here) provides additional guidance on the notional amount of a derivative.
“Over the past 15 years, substantial progress has been made in enhancing transparency in OTC margin models,” suggests Mark Bell, SVP APAC at Clarus. “However, governance remains largely centralised in the clearing houses, with end users playing a limited role in validating models or scrutinising the models used by CCPs.”
This contrasts with bilateral margin models like the ISDA standard initial margin model or SIMM, where end users are required to thoroughly understand, manage and oversee the model, he adds.
A report published in January features a review and policy proposals over “Transparency and responsiveness of initial margin in centrally cleared markets”, produced by by the global standard-setting bodies for cleared markets: the Basel Committee on Banking Supervision (BCBS), the BIS Committee on Payments and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO). Its proposals and practices are intended to improve transparency, streamline margin processes and increase the predictability of margin requirements across centrally cleared markets. It covers aspects of central counterparty transparency and governance and review of initial margin models. The report is the most recent example of the global standard-setting bodies’ efforts to improve the liquidity preparedness of non-bank market participants for margin calls. One of the key conclusions is the need for greater transparency on initial margin models – including through appropriate disclosures and the provision of enhanced margin simulation tools.
The report was informed by data-driven analysis of margin calls and analysis of relevant market events, including the publication of a report on margin calls in the context of the spring 2022 commodity market volatility. Sasha Mills, executive director financial market infrastructure at Bank of England and co-chair of the BCBS/CPMI/IOSCO margin group described the international work on centrally cleared initial margin as a “powerful example of addressing financial stability risks through international coordination across authorities and committees” while fellow co-chair, Richard Haynes, deputy director of risk surveillance at the CFTC said the group had “achieved a balanced and pragmatic set of policy conclusions for implementation.”
