The Bank of England (BoE) is investigating how clients’ transparency about their market positions influences banks’ margin decisions, as insufficient collateral from leveraged clients poses a threat to financial stability, explained Nathanaël Benjamin in a speech, the BoE’s executive director of financial stability strategy and risk.
Kirston Winters, head of Legal, Risk, Compliance and Government and Regulatory Affairs at OSTTRA, said in emailed commentary: “It’s challenging to find the right balance to ensure what level of margin introduces enough safety without reducing liquidity. We support the Bank of England in its effort to find the right balance when seeking to bolster margining processes and reduce risk.”
Erik Petri, head of Optimisation at OSTTRA, said in emailed commentary: “It is also important that firms utilise Post Trade Risk Reduction Services (PTRRS), such as counterparty risk reduction, to rebalance their portfolios and reduce the underlying counterparty credit risk. This will mitigate systemic risk and improve collateral liquidity. We support the Bank of England’s work to increase the efficiency of these services by exempting the administrative transactions that result from PTRRS exercises from the derivatives clearing obligation as outlined in the Wholesale Markets Review.”
Gemma Bailey, business manager of OSTTRA triCalculate, said in emailed commentary: “Benjamin is correct to highlight the importance of improving operational processes related to margin. While risk measures such as calculating appropriate margin & haircut levels are critical, risk is only mitigated once margin is collected. Hence firms should focus on greater automation of the margin process, ensuring they are able to seamlessly calculate, verify, collect and post margin. Other considerations should include expanding their pool of eligible collateral, providing wider flexibility to post non-cash collateral, and reducing the need for ‘fire sales’ during periods of volatility.”
Jo Burnham, margin expert at OpenGamma, said: “Benjamin’s spot on about the need for sound liquidity preparation to avoid pro-cyclical spirals when margin calls hit. Non-banks like hedge funds can only avoid issues by predicting their margin requirements, especially under stress. It’s all about making sure they’ve got enough liquidity available to ride out the storm without causing a bigger problem in the market.”