The European Association of CCP Clearing Houses (EACH) has today responded to the ESMA Consultation ‘Review of RTS No 153/2013 with respect to procyclicality of margin‘. Margins are amounts required by CCPs as independent risk managers from clearing members to either i) protect the members and the CCP against the potential future exposure to a defaulting clearing member from the last margin collection until the liquidation of positions (initial margin); or ii) to reflect current exposures resulting from actual changes in market price (variation margin). Applied to CCP clearing, procyclicality refers to the possibility for certain risk management actions during times of stress to have knock on effects in other parts of the financial ecosystem that may make the stress worse. In line with regulatory requirements, CCPs have a variety of measures to address the potential procyclicality of margins. Anti-procyclicality measures (APC) are important to avoid margin requirements falling too low in good times, entailing a potentially destabilising correction in bad times.
While EACH strongly welcomes ESMA’s intention to ensure that the proposed draft RTS on the review of EU APC measures provides as much flexibility as possible and avoids a too granular approach, we make the following suggestions:
- Timing of the consultation - EACH respectfully questions whether this is the right moment to consult on APC at European level, given that the EMIR APC measures appear to have worked well during recent market stresses, the work at international level on this subject is still ongoing and the ongoing market volatility resulting from the geopolitical events in Europe is making CCPs focus more than ever on their crucial risk management functions.
- Different reactions of margin models to COVID-19 market stress - We believe that CCPs’ margin models may indeed react differently to market stresses because risk appetites vary depending on the CCP and thus the APC policies and procedures will vary by CCP. Different CCPs require the flexibility to adapt their margins to their respective situations. EACH would caution against any trend for CCPs to apply a single or centralised margin model, which a full harmonisation of policies and procedures of risks leads to.
- Regular assessment and reviews of APC measures, Quantitative metrics to measure procyclicality and Application of APC margin measures to all material risk factors (Consultation Sections 4.1, 4.2 and 4.3) – While EACH generally agrees with the proposals made by ESMA in these sections, we have made some suggestions to remove what we understand is unnecessary granularity in the draft RTS.
- APC EMIR tool #1 - Margin buffer under Article 28(1)(a) of the RTS (Consultation Section 5.1) – EACH generally agree with the proposals made by ESMA. We however question the need for CCPs to justify/regularly check the appropriateness of their choice to assess if a higher (more conservative) buffer would be needed.
- APC EMIR tool #2 - 25 % weight to stressed observations under Article 28(1)(b) of the RTS (Consultation section 5.2) – EACH disagrees with the requirement for CCPs to have to consider potential future scenarios identified under Article 30(2)(b) as CCPs consider this unjustified and unnecessary additional work. We would also suggest aligning the review process with the one included in EMIR Article 31 to avoid an unnecessarily burdensome too frequent revision. We would also stress the potential for some of the changes to indirectly lead to higher confidence intervals and therefore suggest ESMA to reconsider these. We would finally call for ESMA to consider an implementation period for this RTS, given that the new approach suggested by ESMA may differ significantly from CCPs’ current practices and the number of changes suggested by ESMA in the draft RTS would trigger several governance procedures such as model validation and approval of risk committees
- APC EMIR tool #3 - Margin floor under Article 28(1)(c) of the RTS (Consultation section 5.3) - We respectfully consider that there are cases where ESMA’s proposal to modify Article 28(1)(c) RTS would present difficulties for CCPs in practice. We consider that the proposal is very prescriptive in terms of the three simultaneous conditions to be met: (1) 10 years; (2) stress events and (3) no scaling. We also consider that the proposed wording does not recognise the CCP internal standards and controls around APC, which would flag if indeed more belt and braces would be required for a 10-years lookback model.
For more information, please see EACH's response to the consultation paper via this link or visit the EACH website at www.eachccp.eu
