European Systemic Risk Board Recommends Options for Addressing Procyclicality in Derivatives Markets and Securities Financing Transactions

The European Systemic Risk Board has published a report on mitigating the procyclicality of margins and haircuts in derivatives markets and securities financing transactions. The report assesses the systemic risks arising from procyclicality associated with margin and haircut practices and makes recommendations for addressing the risks. The ESRB proposes the following six policy options, which aim either to limit the cyclicality of margins and haircuts in derivatives and SFTs or to increase the resilience of market participants:
 

1. Requiring CCPs to pass through intra-day variation margin gains, to avoid removing liquidity from the financial system, particularly during stress.
2. Introducing initial margin floors in cleared and uncleared derivatives, supplementing the existing measures in the European Market Infrastructure Regulation, to ensure that initial margin levels do not fall to very low levels during prolonged periods of low volatility.
3. Addressing risks from procyclicality in client clearing, to ensure that margin and haircut practices of clearing members do not transmit procyclicality through the financial system.
4. Establishing guidance for market participants on the use of notice periods to prevent changes in haircuts and collateral eligibility from occurring suddenly.
5. Introducing a cash collateral buffer for counterparties active in cleared and uncleared derivatives markets, applicable to all margin calls.
6. Extending EMIR risk mitigation techniques for uncleared derivatives to uncleared SFTs.

The ESRB intends to further assess these options and engage with stakeholders and market participants to consider their feasibility.

View the ESRB's report.

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