Learning from the Dash for Cash – findings and next steps for margining practices
Jon Cunliffe talks about the lessons learned following the ‘dash for cash’ observed at the onset of the Covid pandemic. He focuses on the role of margin payments building on relevant international work on this topic.
First, we need to ensure that the necessary pro-cyclicality of margin does not add unnecessarily to a systemic stress.
On variation margin, this means tackling the issue on predictability and preparedness identified but also considering ways toward more efficient collection and distribution of variation margin around the system.
On initial margin, it means looking at the trade-off between levels of margin in business as usual. This is why we have proposed an in-depth evaluation of the responsiveness of centrally cleared initial margin models to market stresses, with a focus on impacts and implications for CCP resources and the wider financial system. This would look into the degree and nature of CCP margin models’ responsiveness to volatility and other market stresses – including impact, costs and benefits of this responsiveness for CCP resources and the wider financial system.
Second, transparency. Participants need to have sufficient information, data, and tools to be able to plan ahead – they need to be able to anticipate what margin calls might look like under stress, and how pro-cyclical they may be. We need to examine carefully whether more could be done, in addition to the information already made available by CCPs, to help market participants to plan ahead.
Ideas that could be looked at in this area include: developing good practices for margin tools and simulators and disclosure of key modelling choices; as well as promoting the use of consistent metrics and disclosures concerning procyclicality, responsiveness to volatility and model performance.
Finally, though reducing the impact of margin call in stress and increasing transparency will help, much will depend on the liquidity management of clearing members and clients. It is worth noting that in our examination we found that there was little reliable data available on client preparedness for stressed margin call.
Future work on in this area could: seek to identify enhancements to liquidity preparedness, including liquidity measures for NBFIs; and look into the effectiveness of intermediaries’ provision of liquidity to clients during stress, also considering how clearing members can encourage and facilitate greater liquidity preparedness of clients.
The full speech is available at https://www.bankofengland.co.uk/speech/2022/february/jon-cunliffe-keynote-address-fia-sifma-asset-management-derivatives-forum