Greater transparency of CCP margin models is an important step to avoid situations where sudden increases in margin catch people unawares, argues Scott O’Malia, CEO of the International Swaps and Derivatives Association (ISDA). “These situations can lead to a liquidity squeeze that can exacerbate market stresses.”
O’Malia recently discussed the significance of margin in financial markets, particularly evident during stress episodes such as the March 2020 dash for cash. He commended regulatory proposals aimed at enhancing margin practices, with a strong emphasis on transparency and responsiveness.
ISDA’s latest margin survey reveals substantial initial margin postings by market participants. O’Malia warns against unexpected margin hikes, advocating for increased transparency to mitigate liquidity squeezes and market stress.
Highlighting the importance of transparency, O’Malia stresses its role in empowering market participants to anticipate and manage margin fluctuations effectively. Reflecting on recent market challenges, including liquidity strains and volatility spikes, he advocates for proactive risk management strategies.
Procyclicality approach
While supporting current proposals, O’Malia calls for additional measures to ensure margin stability. Specifically, he proposes enhanced disclosure of CCPs’ procyclicality approach, allowing market input for prudent risk management. Additionally, he suggests a review of margin period of risk and anti-procyclical tool calibration to prevent excessive margin reductions during low volatility periods.
Comparing practices across cleared and non-cleared derivatives markets, O’Malia highlights the resilience of ISDA SIMM during stress events. “We’ve worked closely with regulators to ensure its continued resilience by reviewing the responsiveness of the model”, says O’Malia. “As part of that review process, we’re preparing to move to semiannual calibration next year to make sure the ISDA SIMM continues to be predictable and risk appropriate in all market conditions.”