VIDEO | Surprise margin calls to clearing members and their clients, and risks of having to pay big money to cover for bad bets by someone else … While central clearing is overall a risk-mitigating service to use, these are two of the negative side effects that users need to manage. A PostTrade 360° Stockholm panel looked into the trends in the area known as CCP recovery and resolution, and margin calculation – spotting room for improvements. On stage: BNP Paribas’ Haroun Boucheta, Cboe Clear Europe’s Vikesh Patel, LCH’s Dhruve Bhavsar, and industry expert Sean Tuffy.

Scroll to the bottom to watch the recorded half-hour session.

“During the energy crisis [in 2022], sometimes we had margin calls from CCPs, to be covered on the same day, which were not only unexpected but also in incredibly high numbers,” said Haroun Boucheta, representing major European clearing member BNP Paribas.


Meeting senior representatives of two large European clearinghouses on the stage in Stockholm, he highlighted the transparency of the margin methodologies at the central counterparty clearinghouse (CCP) – and thus the predictability of the margin calls – as one of two main areas for improvement in the functioning of CCPs from his viewpoint.

Industry expert Sean Tuffy, moderated the session (headlined “Talk of the devil”) with panellists
Dhruve Bhavsar, Head of Risk, Equities, RepoCLear & CaLM Business Risk, LCH,
Vikesh Patel, President, Cboe Clear Europe (known until last year as EuroCCP), and
Haroun Boucheta, Head of Public Affairs, Securities Services, BNP Paribas.

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Markets will swing, and when the counterparty obligations of a clearinghouse member suddenly goes beyond what they have posted collateral for, they will get an urgent call for a fill-up of liquid assets as margin. (Then, if the member, often a bank, acts on behalf of a client, the member will in turn call the problematic client.) Annoyingly enough for the clearing members, however, it can be hard to know just how the CCP makes its calculation.

Seeks a complement to EMIR 3.0 proposal

“We act as a clearing member mainly for our clients, so we were in a situation where we had to call our clients with just incredibly high margin calls on an intraday basis, so ‘now’. I am sure things could be improved in terms of how to build the risk committee, which is where clearing members interact with their CCP, to discuss the margin methodologies and try to anticipate such sudden rises of the margin calls,” Haroun Boucheta continued.

On EU level, the next generation of regulation for market infrastractures, EMIR 3.0, is underway as a proposal. While it has been discussed most publicly for its ambition to move clearing activities into the EU from “third-party” countries, now including the UK, it also includes new transparency obligations for clearing members to help their clients predict margin calls. What Haroun Boucheta would like to see added, is a similar transparency requirement for the CCPs in relation to their members.

“Skin in the game” could be split into two tranches

Another ongoing discussion between CCPs and their members is the one regarding recovery and resolution – that is, who should pay for remaining losses if a clearing member defaults on its debts to its counterparties after surprising value swings. PostTrade 360° has dived into the topic occasionally (for example in this 2020 session with several representatives of banks and clearinghouses). This is where Haroun Boucheta points to the benefit it could bring if the reserves that the CCP owners chip in, often referred to as their “skin in the game”, were divided into two tranches. The first part would kick in before the non-defaulting members are charged, as today, but then also a new one that is sandwiched in after a bit, to incentivise continuing caution on the CCP side. Regulation in the area is coordinated not least by the international Financial Stability Board, which seems to be weighing in behind large clearing members in their calls for higher reserve input from the CCP owners. See our article on the subject from last autumn’s AFME conference, where Haroun took part in the panel, too.

Three ways of adapting to the new volatility

Dhruve Bhavsar of LCH described what he sees as “a volatility regime change” – a market shift to a more volatile climate after over ten calm years since the great financial crisis. In passing, he mentioned the Covid pandemic, Russia’s Ukraine invasion and subsequent sanctions and the UK “mini-budget crisis”.

He went on to list three mechanisms by which he sees the industry as having adapted quickly. The first one is building close relations with members, and letting the banks have a greater say in risk management techniques. Secondly, the operational resilience has been addressed, with system build-outs, and measures against outages, also at CSDs and data providers.

“Then, the third one, I think, is investing in the toolkit that the CCPs have, ensuring we are open and transparent with our members – so that if a crisis should hit again in the future, they understand what the impact would be in terms of their liquidity profile and margin requirements,” said Dhruve Bhavsar.

He referred to internal checks in his own organisation, indicating that not only one or two members would have to default before claims would need to reach “the lower layers of the waterfall” – that is, the reserve input of non-defaulting members. More likely, it would take almost 30 percent of the membership defaulting. In line with this, rather than adding a second tranche of “skin in the game”, Dhruve Bhavsar suggests the CCP should be able to call for more reserve funds from its members if that hypothetical number of defaulters would get too small in the scenarios.

Dialogue with the watchdogs could be better, too

Vikesh Patel, of Cboe Clear Europe, sees no argument against CCPs being transparent. “I think it’s a good thing, the more information people can have that gives the markets the ability to prepare and anticipate,” he said. However, the surprise element lies not only in calculation models, but very much in the unpredictable nature of the markets as such: “You can build models around market volatility, but the thing is that we are just moving so quickly – whether it’s the price of the underlying asset versus the credit rating or counterparty rating of the participants.”

While most of the session lingers on the framework for recovery, Vikesh Patel also commented on the resolution bit – for the highly improbable but very important possibility that a CCP would go bust and a national supervisor (“competent authority”) would need to take charge.

“On resolution, I think there’s a lot more work to be done on transparencies between the competent authorities and the CCPs, if I’m honest. You know, we provide information into that. I recognize that there are reasons why competent authorities may want to choose not to share the resolution plan. Nor am I asking to see the resolution plan for my organization. What I think we can make more progress on is ‘What elements do the competent authorities want to see?’, ‘How would the broad actions they would take operate?’ And how would they enact those, so that we can make sure that – touch wood – if we ever get in that situation, you’re geared up and my organization has got the information that people are going to need pretty instantaneously,” said Vikesh Patel.

“So it doesn’t need to be full transparency on every single step that the authority would take. They would want flexibility to do things I get that. But continuing that transparent discussion … there’s more mileage there for sure.”

Failures are rare – but do occur

A core idea of central clearing, as modern financial markets know it, is that clearinghouse members stand collectively as guarantors if one member defaults on its obligations to its counterparties for unsettled trades. Only on single occasions through history has it needed to go so far, as the member default is usually covered by the collateral posted by that member itself (such as Lehman’s member default at LCH.Clearnet in 2008, where only about a third of Lehman’s own margin postings were consumed for resolving the case), and another layer of reserves needs to be chipped in by the CCP owner before digging into the funds of the non-defaulting members.

Yet, while these CCP failures are exceptional, they do occasionally occur. And in the Stockholm setting of this PostTrade 360° conference, some people in the room would be likely to carry uneasy memories of the energy-trader default in 2018 which saw non-faulting members of the Nasdaq Clearing commodities section obliged to fill in 100 million euro, at a notice of single days or less. (Interesting analyses of that story were written here by Amir Khwaja as it happened, and here by experts at the Bank for International Settlements with the benefit of hindsight.) To get started on the topic of CCP distress, this five-page paper by researcher Lucia Országhová is an interesting entry point.

• News around PostTrade 360° Stockholm 2023, on 29–30 March, is gathered here.
• The conference info site, with detailed agenda, is here.
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