The ISDA Clearing Member Committee (the "Committee") reported on the effectiveness of clearinghouse risk management frameworks during the market turmoil of March and April of 2020.
In its Report, the Committee found that, despite three member defaults/closeouts, clearing members were able to withstand the market volatility. The Committee also found that clearing members were better capitalized and able to hold more liquidity in comparison to the 2008 financial crisis.
The Committee noted that (i) procyclical initial margin ("IM") requirements contributed to market stress and (ii) there was a substantial lack of timely information regarding backtesting breaches and procyclicality in margin models.
The Committee recommended that:
- central counterparties ("CCPs") calibrate their anti-procyclicality tools in order to ensure that initial margin increases in response to market volatility are less severe in the future;
- CCPs enhance the transparency of their margin models to clearing participants in order to improve the predictability of margin levels during times of market stress;
- a standardized procyclicality measurement in CCP models be established to allow for a common measurement of the ratio between stressed and normal times; and
- CCPs increase the frequency of their public quantitative disclosures on critical data points, such as IM, default fund contributions and backtesting breaches.
The Committee also provided highlights of a survey of CCPs in response to how their risk management frameworks fared under the pandemic.
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