EU Consultation on CCP Procyclicality of Margin Requirements

The European Securities and Markets Authority has opened a consultation in which it proposes to amend the requirements on EU CCPs relating to an additional charge related to the procyclicality of margin. Responses to the consultation should be submitted by March 31, 2022. The European Market Infrastructure Regulation requires CCPs to impose, call and collect margins to limit their credit exposures from clearing members. A CCP must also regularly monitor and, if necessary, revise the level of its margins to reflect current market conditions considering any potentially procyclical effects of those revisions. Procyclicality of margin is the term used to describe the fact that margin requirements for the same portfolio are higher in times of market stress and lower in calm conditions. Regulatory Technical Standards under EMIR set out requirements for CCPs to use at least one of three options to limit procyclicality to the extent that the financial soundness of the CCP is not negatively affected. Generally, the EU imposes higher (more costly) margin charges than most other jurisdictions, including the U.S. and other major financial centres, which have essentially no extra procyclicality charge for CCPs.

ESMA is now proposing to amend the requirements on EU CCPs relating to procyclicality of margin as a response to the market turmoil at the start of the COVID pandemic where large increases in margin occurred in the centrally and non-centrally cleared markets, furthering the so-called "dash for cash". According to ESMA, change is needed to ensure further harmonization of the approach across the EU, which it says can be done by adding more granular requirements to the technical standards and incorporating its guidelines for CCPs into the technical standards so that they have binding effect.

This consultation comes just a few weeks after the close of the international consultation (run by the Basel Committee, CPMI and IOSCO) on margining practices in the centrally and non-centrally cleared markets, and before the publication of their report. ESMA states that it seeks a balance in acting now and before the final report—it wants to enhance the EU's existing rules but is not seeking to add any requirements (e.g., on transparency).

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