The role of margin requirements and haircuts in procyclicality

Bank for International Settlements

No 36 in CGFS Papers from Bank for International Settlements

Abstract: Terms and conditions on secured lending transactions, as well as the changes to the eligible pool of collateral securities and the applicable haircuts on them, affect the access to credit and risk-taking behaviour of leveraged market participants. The study group report on The role of margin requirements and haircuts in procyclicality under the chairmanship of David Longworth of Bank of Canada reviews market practices for setting credit terms applicable to securities lending and over-the-counter derivatives transactions with a view to assess how these practices may contribute to financial system procyclicality. The report recommends a series of policy options, including some for consideration, directed at margining practices to dampen the build-up of leverage in good times and soften the systemic impact of the subsequent deleveraging.

Date: 2010 Written 2010-03
ISBN: 92-9131-820-5
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