Journal of Financial Market Infrastructures

Cleared margin setting at selected central counterparties

Richard Heckinger, Robert T. Cox and David Marshall

In this paper, we address one aspect of central counterparty (CCP) risk management: initial margining practices. We provide readers with a historical review of margining at selected CCPs as well as an overview of their current margin policies. We argue that since all CCPs are unique, margining policies are not one size fits all; each CCP must use the tools outlined below in the manner it deems most appropriate to the markets it clears. Our review of margining tools and policies is intended to provide the reader with a sense of the options available to a CCP and its regulators as they determine an appropriate margining policy. After reviewing the historical development of CCPs and their margining practices, we outline the two key margining frameworks: risk-based and rules-based. We then provide a deeper examination of specific margin-setting methodologies. Next, we discuss some CCP-level considerations in margin setting that are based primarily on how a CCP views the risks posed by its clearing members. Finally, we outline some challenges and ongoing policy issues.

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