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A CBA of APC: analysing approaches to procyclicality reduction in CCP initial margin models

David Murphy and Nicholas Vause ()
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Nicholas Vause: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 950, Bank of England working papers from Bank of England

Abstract: Following a period of relative calm, many derivative users received large margin calls as financial market volatility spiked amid the onset of the Covid‑19 global pandemic in March 2020. This reinvigorated the policy debate about dampening such ‘procyclicality’ of margin requirements. In this paper, we suggest how margin setters and policymakers might measure procyclicality and target particular levels of it. This procyclicality management involves recalibrating margin model parameters or applying anti-procyclicality (APC) tools. Different options reduce procyclicality by varying amounts, and do so at different costs, which we measure using the average additional margin required over the cycle. Thus, we perform a cost-benefit analysis (CBA) of the different options. We illustrate our approach using a popular type of margin model – filtered historical simulation value-at-risk – on simple portfolios, presenting the costs and benefits of varying a key model parameter and applying a number of different APC tools, including those in European legislation.

Keywords: Central counterparty; cost-benefit analysis; derivatives clearing; initial margin models; mandatory clearing; procyclicality (search for similar items in EconPapers)
JEL-codes: G17 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2021-11-19
New Economics Papers: this item is included in nep-cmp, nep-ore and nep-rmg
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