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Market Participants Discuss CCP Margin Levels

Jan Bart de Boer, chief commercial officer at ABN Amro Clearing Bank, said there will be a discussion this year between central counterparties and their clearing members on the redistribution of risk and reward following the increased volatility caused by the Covid-19 pandemic.

He was interviewed during the Eurex Digital Derivatives Forum this morning.

Jan Bart de Boer, ABN Amro Clearing Bank

de Boer continued there has been a slow burning discussion between market participants and CCPs on the distribution of risk and reward which has become more urgent since Covid-19 caused an increase in volatility in March.

“Margins increased over a very short time so maybe they are too low in normal markets ?” he added. “The performance of CCPs has been stellar but clearing members have lost a year of income.”

de Boer said ABN Amro Clearing Bank had performed its role of absorbing risk very well during March.

“We had one failure out of 700 clients, after 20 years of no losses, which shows how extreme the markets were,” he added.

Philip Simons, global head of sales, fixed income derivatives funding & financing at Eurex, said during the forum that the volatility in March led to five days of volumes that are amongst the all-time top 10, with monthly volume 85% higher than in 2019.

In addition, Eurex made 51 intra-day margin calls in March compared to 19 last year.

Simons continued that equity derivatives had the highest increase in margins in March.

“The Eurostoxx 50 margin rose from 7% to 17%,” he said. “The increase could have been more dramatic but we use a longer period for our risk calculations and have a stress floor.”

He agreed that the market should debate margin levels, as some participants want a smaller rise during periods of volatility.

“For our clients margin optimisation is high on their agenda,” Simons added. “The market should move towards the integration of repo trading, securities lending and derivatives.”

Bank of England research

The Bank of England said in a research report that daily variation margin calls by UK CCP in derivatives markets in March were around five times the average daily margin calls for January and February. Variation margin calls also increased for uncleared derivatives.

The UK central bank said margin helped to ensure derivatives markets remained resilient throughout the recent market shock but also resulted in a large movement of liquidity around the financial system.

“This contributed to a ‘dash for cash’ in March 2020, as some market participants appeared to have insufficient buffers of cash-like assets to meet actual or anticipated margin calls,” said the study.

The report said prudent margining is an important part of risk management in the system and is not a trade-off with liquidity risk.

“Participants in derivatives markets should ensure their liquidity management strategies take account of the possibility that margin calls and requirements may rise significantly during periods of market turbulence,” added the Bank of England.