Swaps data: initial margin soars in Q1 2020

Model procyclicality drives wide variation in CCP IM hikes through Covid-19 volatility, writes Amir Khwaja of ClarusFT

The first quarter of 2020 was unprecedented in almost every way. Global lockdowns intended to control the Covid-19 pandemic tested market liquidity to the limit as financial markets experienced their widest ride in a decade.

A new set of quarterly CPMI-Iosco quantitative disclosures highlight the impact of whipsawing prices on clearing houses during that turbulent first quarter – and they make for an interesting read.

Larger and more frequent price changes result in higher volatility, which in turn feeds into initial margin (IM) requirements. Models produce higher amounts irrespective of whether they are Span, historical simulation, Monte-Carlo simulation or stress scenario based. That is what the data shows, yet differences in relative increases between products and clearing services are surprising.

Categorising clearing services into interest rate swaps, credit default swaps, and futures and options, we see that IM increased in the quarter for these by 23%, 46% and 66% respectively. Some of this difference reflects varying price volatility observed in each of these products. But the biggest contributor comes down to the procyclicality of the models themselves; so how much the IM increases in times of high volatility and decreases in periods of low volatility.

Comparing different clearing services with the same product class also throws up wide divergence. For interest rate swaps the quarterly changes range from 23% to 61% and for credit default swaps from 44% to 65%. For futures and options, we need to be more careful in drawing conclusions as the constituent clearing services are cross-asset, covering rates, equity, commodities and foreign exchange. While larger differences seem reasonable, a range of 20% to 100% for quarterly IM change exceeds expectation.

The magnitude of these relative differences is a topic that warrants more attention and discussion. Should there be more consistency in assumptions of procyclicality of margin? Is that a desirable goal? Is it possible given the diverse markets, models and the design choices for overall risk management? These are huge topics for future debate and discussion, for today, let’s look at the data and detail.

Cleared interest rate swaps

Starting with the largest over-the-counter product, interest rate swaps and quarterly trends.



Figure 1 shows:

  • Total IM of $271 billion, up $51 billion or 23% in the first quarter from the prior quarter (quarter-on-quarter) and up $90 billion or 50% from a year earlier (year-on-year).
  • LCH SwapClear with $199 billion IM on March 31, 2020, which is up $28 billion or 16.5% quarter-on-quarter and up $54 billion or 37% year-on-year in dollar terms.
  • CME IRS with $40 billion, up 38% quarter-on-quarter and 76% year-on-year.
  • Eurex IRS with $20 billion, up 61% quarter-on-quarter and 207% year-on-year.
  • JSCC IRS with $12 billion, up 45% quarter-on-quarter and 93% year-on-year.

The cumulative total for these four clearing services of $271 billion IM on March 31, 2020 is a new record and the size of the jump is unprecedented in recent history. While some of this increase will be driven by a changed risk position from the start of the quarter, the bulk of the increase is likely to be from higher market volatility in driving an increase in the IM model requirement.

The relative quarterly increases vary dramatically – 16.5% at LCH SwapClear, 38% at CME, 45% at JSCC and 61% at Eurex. Unless the increase in risk positions cleared at LCH SwapClear was relatively smaller than at the other CCPs, which is unlikely, this suggests the LCH SwapClear IM model is much less procyclical than the other CCPs. Intuitively we may expect this to be the case as the IM model disclosures tell us that LCH SwapClear uses a 10-year lookback period, CME and JSCC are five years, while Eurex is just three years. However, both CME and Eurex IM Model disclosures also state the use of additional stress periods, while JSCC does not. With this in mind, it is understandable that JSCC’s margin increase would be much larger than LCH’s, which it is. It might also be reasonable to expect CME, Eurex and LCH to be in a similar ballpark, which they are not.

Cleared credit default swaps

Let’s turn next to credit default swaps, both index and single name.



Figure 2 shows:

  • Ice Clear Credit the largest with $50 billion, up $15 billion or 44% quarter-on-quarter and $16 billion or 48% year-on-year.
  • Ice Clear Europe with $11 billion, up 49% quarter-on-quarter and 67% year-on-year.
  • LCH CDSClear with $5 billion, up 65% quarter-on-quarter and 51% year-on-year, in US dollar terms.

The cumulative total IM for these three clearing services was $67 billion on March 31, 2020, an increase of 46% from the prior quarter and 51% from a year earlier. Similar to interest rate swaps, the bulk of the IM increase is likely to be from higher market volatility driving an increase in the IM model requirement and credit spreads were particularly very volatile in this period.

Futures and options

Exchange traded derivatives, namely futures and options show similar increases in initial margin.



Figure 3 shows:

  • CME Base the largest with $190 billion, up $82 billion or 75% quarter-on-quarter and $96 billion or 102% year-on-year.
  • Options Clearing Corporation with $91 billion, up 70% quarter-on-quarter and 112% year-on-year.
  • Eurex Clearing with $76 billion, up 108% quarter-on-quarter and 92% year-on-year in US dollar terms.
  • Ice Clear Europe F&O with $57 billion, up 20% quarter-on-quarter and 22% year-on-year in US dollar terms.
  • Ice Clear US F&O with $31 billion, up 64% quarter-on-quarter and 82% year-on-year.
  • JSCC ETP with $19 billion, up 118% quarter-on-quarter and 120% year-on-year.
  • SGX DC, HKEX HKCC, ASX CLF with 21%, 33% and 13% quarter-on-quarter increases.

The cumulative total IM for these clearing services was $487 billion on March 31, 2020, an increase of $195 billion or 66% from the prior quarter. This is a much larger increase than either interest rate swaps and credit default swaps, which were up 23% and 46% respectively.

The relative quarterly changes between the futures and options CCPs are also interesting, ranging from 118% at JSCC ETP to 22% at Ice Clear Europe F&O.

Both of these are probably explained by the sharp increases in IM for futures and options in March, as highlighted in the BIS bulletin covered in my article, procyclical margins in the time of Covid-19, due to the higher procyclical calibration of these IM models as compared with interest rate swaps.


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