Economics at your fingertips  

A comparative analysis of tools to limit the procyclicality of initial margin requirements

David Murphy, Michalis Vasios and Nicholas Vause ()

No 597, Bank of England working papers from Bank of England

Abstract: The requirement to post initial margin on derivatives transactions is a key feature of the post-crisis reforms of the OTC derivatives markets. Initial margin requirements are usually determined by risk-based models. These models typically require increased margin in stressed conditions: they are procyclical. This procyclicality causes a liquidity burden on market participants which sometimes falls when they are least able to bear it. In this paper we study a variety of tools which have been proposed to mitigate the procyclicality of initial margin requirements. Three of these tools are proposed in European regulation; the other two are new proposals which offer attractive procyclicality mitigation features. The behaviour of all five tools is studied in a simulation framework. We examine the extent to which each tool mitigates procyclicality, and at what cost in demanding unnecessary margin compared to a benchmark unmitigated model. Our findings indicate that all of the tools are useful in mitigating procyclicality to some extent, but that the optimal calibration of each tool in a particular situation depends on the relative weights placed by the modeller on the objectives of minimizing procyclicality on the one hand and minimizing undesirable overmargining in periods of low volatility on the other. This suggests that it may be appropriate to consider moving from tools-based procyclicality regulation to one based on the desired outcomes.

Keywords: Central counterparty; central clearing; initial margin; margin models; OTC derivatives; procyclicality (search for similar items in EconPapers)
JEL-codes: G17 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016-04-22
New Economics Papers: this item is included in nep-ban, nep-cmp, nep-pke and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link) ... D68FE05363CA09758284 Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().

Page updated 2024-06-16
Handle: RePEc:boe:boeewp:0597