ESMA publishes CCP consultation responses
09 March 2018 Paris
Image: Shutterstock
The European 麻豆传媒 and Markets Authority (ESMA) has published a range of responses to the consultation on its draft guidelines on procyclicality-mitigating margin measures for central counterparties (CCPs).
Eurex Clearing, the London Stock Exchange (LSE) and LCH Group are some of the prominent names to have shared their thoughts on the subject.
Eurex said that regulators view margin procyclicality from at least two perspectives.
The first is microprudential and pertains to the impact that procyclical margin revisions could have on the liquidity needs of market participants who need to meet such additional requirements.
The second is macroprudential: the procyclical margins fall in the period of low volatility allowing market participants to increase their financial leverage.
Eurex said the margin revisions associated with an increase in market volatility necessitate de-leveraging which itself might accentuate the effects on the markets.
鈥淭he impact on the liquidity of a market participant caused by initial margin revisions in a period of increased market volatility is a valid consideration,鈥� added Eurex.
However, it concluded that the effect of a change in the initial margin 鈥渋s dwarfed by the liquidity needs that arise from variation margin payments (intra-day and daily collateralisation)鈥�.
Eurex Clearing went on to argue that the most appropriate steps to mitigate adverse effects of procyclicality are an outcome-based approach where outcome measures are clearly aligned with explicit regulatory goals, regulatory harmonisation of outcome-based measures at a global level, and public disclosure of harmonised key metrics allowing transparency for both market participants and all regulatory bodies.
It suggests that the first step in such strategy would be an alignment on which measures are most relevant from a regulatory point of view in the sense of addressing a specific regulatory goal.
The London Stock Exchange (LSE) said it supports the notion of clear guidelines and believes that clear and documented measures to avoid procyclical effects should be part of a proper risk management framework.
LSE added that the proposed examples of quantitative metrics for monitoring the efficiency of anti-procyclicality margin measures should be complemented by the analysis of co-movement of market indicators and margin requirements changes.
It said that the absolute change in margin parameters over a certain time span cannot be considered sufficient to assess the effectiveness of the anti-cyclical measures.
LSE concluded it has reservations about the ESMA proposal that CCPs that adopt article 28(1)(c) of regulatory technical standards should not use modelling procedures to alter the weights of the observations when computing the margin floor using the 10-year volatility estimate. Where a 10-year lookback period is used, margin calculation should be fed with at least a 99 percent confidence level and a two-day holding period.
It said that scaling must be allowed using the 10-year volatility estimate, provided that the input parameters do not fall under the minimum required by the European Market Infrastructure Regulation. Any restriction on scaling would weaken CCP incentives to establish more conservative policies than the minimum regulatory requirements, according to LSE
In its response, LCH considers procyclicality to be a very important issue for a CCP and that it implemented rigorous standards in this regard several years ago.
There are also considerations coming from product specific characteristics, according to the clearing company, for example, repo contracts can involve physical settlement risk and this is not present for financially settled products such as interest rate derivatives.
LCH added: 鈥淐CPs might develop metrics and thresholds that cover a wider scope than those proposed in this consultation and these would likely differ between CCPs due to the potential sources of procyclicality contributing different degrees of procyclical risk.鈥�
Eurex Clearing, the London Stock Exchange (LSE) and LCH Group are some of the prominent names to have shared their thoughts on the subject.
Eurex said that regulators view margin procyclicality from at least two perspectives.
The first is microprudential and pertains to the impact that procyclical margin revisions could have on the liquidity needs of market participants who need to meet such additional requirements.
The second is macroprudential: the procyclical margins fall in the period of low volatility allowing market participants to increase their financial leverage.
Eurex said the margin revisions associated with an increase in market volatility necessitate de-leveraging which itself might accentuate the effects on the markets.
鈥淭he impact on the liquidity of a market participant caused by initial margin revisions in a period of increased market volatility is a valid consideration,鈥� added Eurex.
However, it concluded that the effect of a change in the initial margin 鈥渋s dwarfed by the liquidity needs that arise from variation margin payments (intra-day and daily collateralisation)鈥�.
Eurex Clearing went on to argue that the most appropriate steps to mitigate adverse effects of procyclicality are an outcome-based approach where outcome measures are clearly aligned with explicit regulatory goals, regulatory harmonisation of outcome-based measures at a global level, and public disclosure of harmonised key metrics allowing transparency for both market participants and all regulatory bodies.
It suggests that the first step in such strategy would be an alignment on which measures are most relevant from a regulatory point of view in the sense of addressing a specific regulatory goal.
The London Stock Exchange (LSE) said it supports the notion of clear guidelines and believes that clear and documented measures to avoid procyclical effects should be part of a proper risk management framework.
LSE added that the proposed examples of quantitative metrics for monitoring the efficiency of anti-procyclicality margin measures should be complemented by the analysis of co-movement of market indicators and margin requirements changes.
It said that the absolute change in margin parameters over a certain time span cannot be considered sufficient to assess the effectiveness of the anti-cyclical measures.
LSE concluded it has reservations about the ESMA proposal that CCPs that adopt article 28(1)(c) of regulatory technical standards should not use modelling procedures to alter the weights of the observations when computing the margin floor using the 10-year volatility estimate. Where a 10-year lookback period is used, margin calculation should be fed with at least a 99 percent confidence level and a two-day holding period.
It said that scaling must be allowed using the 10-year volatility estimate, provided that the input parameters do not fall under the minimum required by the European Market Infrastructure Regulation. Any restriction on scaling would weaken CCP incentives to establish more conservative policies than the minimum regulatory requirements, according to LSE
In its response, LCH considers procyclicality to be a very important issue for a CCP and that it implemented rigorous standards in this regard several years ago.
There are also considerations coming from product specific characteristics, according to the clearing company, for example, repo contracts can involve physical settlement risk and this is not present for financially settled products such as interest rate derivatives.
LCH added: 鈥淐CPs might develop metrics and thresholds that cover a wider scope than those proposed in this consultation and these would likely differ between CCPs due to the potential sources of procyclicality contributing different degrees of procyclical risk.鈥�
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