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An Empirical Analysis of Futures Margin Changes: Determinants and Policy Implications

Nicole Abruzzo and Yang-Ho Park
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Yang-Ho Park: https://www.federalreserve.gov/econres/yang-ho-park.htm

No 2014-86, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Margin regulation raises two policy concerns. First, an alignment of margins to volatility can amplify procyclicality, leading to a build-up of excess leverage in good times and a forced deleverage in bad times. Second, competition among central counterparties (CCPs) can result in lower margin levels in order to attract more trading volume, which is referred to as a \"race to the bottom.\" Motivated by these issues, we empirically analyze the determinants of margin changes by using a data set of various futures margins from Chicago Mercantile Exchange (CME) Group. We first find that CME Group raises margins quickly following volatility spikes but does not immediately lower margins following volatility declines, implying that margin-induced procyclicality is more of a concern in recessions than in expansions. In addition, we find some evidence that the margin difference between CME Group and its competitor, Intercontinental Exchange (ICE), is an important driver of margin changes after changes in other margin determinants are controlled for, implying that competition may be factored into margin setting.

Keywords: Margin; futures; volatility; central counterparties; procyclicality; race to the bottom; Dodd-Frank Act (search for similar items in EconPapers)
JEL-codes: G01 G18 G28 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2014-09-02
New Economics Papers: this item is included in nep-cfn
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