A Comparative Analysis of Tools to Limit the Procyclicality of Initial Margin Requirements

Murphy, David; Vasios, Michalis; Vause, Nicholas

doi:10.2139/ssrn.2772569

Cited by 22 publications

(25 citation statements)

References 8 publications

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“…This way, when volatility is low the margins are fixed at a conservative floor level that corresponds historically to about 29% quantile of the lowest margins for SPX, and at the time of market stress they can't go above the upper threshold. It is an interesting coincidence that the estimated lower threshold for SPX using the EWMA model corresponds to the 25% of observations in the lower regime, as was also suggested by Murphy et al (2016). For TSX, the margin buffer is a higher 32% of observations on average.…”

Section: Figures 9 and 10 Heresupporting

confidence: 74%

“…The CCPs, by acting as intermediary, have exposure to both the buyer and the seller. The initial margins are typically set by CCPs based on VaR models (Murphy et al (2016), Knott and Polenghi (2006)).…”

Section: Introductionmentioning

confidence: 99%

“…As documented in Murphy et al (2014Murphy et al ( , 2016 and Glasserman and Wu (2017) margin models are typically procyclical and may negatively impact members' funding liquidity at the times of crisis. We explore the procyclicality of initial margin requirements based on VaR volatility models above.…”

Section: Introductionmentioning

confidence: 99%

“…CCPs try to reduce the procyclicality of their models by using various methods, including setting floors on margin. Some such methods are discussed in white papers produced by the Bank of England (Murphy et al (2016)). Their study suggests five tools, including a floor margin buffer of 25% or greater to be used in times of stressed conditions.…”

Section: Introductionmentioning

confidence: 99%

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Analysis of Asymmetric GARCH Volatility Models with Applications to Margin Measurement

Goldman

Shen

2017

SSRN Journal

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Bank of Canada staff working papers provide a forum for staff to publish work-in-progress research independently from the Bank's Governing Council. This research may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.

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Section: Figures 9 and 10 Heresupporting

confidence: 74%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Analysis of Asymmetric GARCH Volatility Models with Applications to Margin Measurement

Goldman

Shen

2017

SSRN Journal

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“…Our paper is also related to studies on margin procyclicality (see e.g. Murphy et al, 2014Murphy et al, , 2016 and price procyclicality (see e.g. Danielsson et al, 2012;Danielsson and Zigrand, 2008).…”

Section: Related Literaturementioning

confidence: 81%

Margin requirements and systemic liquidity risk

Bakoush

Gerding

Wolfe

2019

Journal of International Financial Markets, Institutions and Mo

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We develop a model in which margin procyclicality and the propensity for liquidity hoarding interact to generate a systemic liquidity crisis. In this model, banks lend and borrow in the interbank market to mitigate liquidity risk and trade derivatives contracts in the OTC derivatives market to mitigate market risk. The daily mark-to-market of derivatives contracts results in daily margin calls that banks cover using high quality liquid assets. We find that distress due to margin procyclicality in the derivatives market can spillover to the interbank market leading to systemic liquidity risk. Interconnectedness further amplifies the effects of systemic risk within the interbank market. The model shows that central clearing might increase the possibility of systemic liquidity risk due to tight margin requirements and the timing of cash flows required from banks. We also find that haircut levels affect the possibility of systemic liquidity risk, and highlight the potential role of a market maker of last resort in limiting this possibility.

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Margin requirements based on a stochastic correlation model

Szabó

Váradi

2022

Journal of Futures Markets

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We demonstrate that margin requirements of central counterparties show a significantly different behavior when calculated with a portfoliowise treatment instead of taking the weighted sum of the margin requirements of the components without accounting for their correlation structures. This is shown via simulating trajectories of a joint stochastic volatility–stochastic correlation model. Results indicate that an unnecessarily large overmargin requirement is set by regulators when the applied risk measure is not calculated via a portfoliowise treatment. Finally, accounting for the correlation structure of the assets during the margining process would not lead to an overly prudent method, nor would it cause greater procyclicality.

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A Comparative Analysis of Tools to Limit the Procyclicality of Initial Margin Requirements

Cited by 22 publications

References 8 publications

Analysis of Asymmetric GARCH Volatility Models with Applications to Margin Measurement

Analysis of Asymmetric GARCH Volatility Models with Applications to Margin Measurement

Margin requirements and systemic liquidity risk

Margin requirements based on a stochastic correlation model

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