Using Speed and Credit Limits to Address the Procyclicality of Initial Margin at Central Counterparties

Nikil Chande and Nicholas Labelle

Discussion Papers from Bank of Canada

Abstract: This paper proposes a practical approach to address the procyclicality of initial margin at central counterparties (CCPs) that can work even in periods of extreme stress. The approach allows CCPs to limit the speed of margin increases resulting from spikes in market volatility. To maintain the desired level of risk protection, the model covers, through loss-sharing arrangements, a chosen number of the largest shares of the margin increases that are deemed procyclical. To facilitate adoption of this approach, we allow loss sharing to be capped through the allocation of bilateral credit limits. We undertake an empirical exercise to demonstrate that, even with conservative assumptions, the proposed approach can generate significant margin relief without generating losses that cannot be absorbed by clearing members.

Keywords: Financial markets; Financial stability; Financial system regulation and policies; Payment clearing and settlement systems (search for similar items in EconPapers)
JEL-codes: G G1 G18 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2016
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocadp:16-18

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