Research Working Paper on the Procyclicality of CCP Margin Models by The World Federation of Exchanges
The WFE Research report finds that there are tensions and trade-offs between the need for risk sensitivity and the potential procyclicality of CCP Margin Models—that is, the need to call for margin when market conditions deteriorate. Accordingly, questions about procyclicality would be better addressed by acknowledging that procyclicality is a property of the system as a whole and so requires system-wide solutions, identifying interdependencies, incentives, and behaviours across the ecosystem that could lead to unsafe situations.
Margin requirements are a fundamental part of CCPs’ management of counterparty risk, ensuring that the exposure to a failing member will be sufficiently collateralized and, as consequence, the CCP creates a buffer against financial contagion. The Paper concludes that calls to address the procyclicality of margin calls by further recalibrating margin models are misplaced, because: Read more
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