Lower margin can fuel procyclicality in CCPs – research

Efforts to prevent ‘margin spiral’ during stress could encourage more risk-taking, paper argues

CCPs risk producing a margin spiral if they allow requirements to rise too fast during high volatility

Margin calls in times of crisis can make markets plunge further by increasing the stress on troubled banks – but relaxing rules to avoid this margin spiral could be just as bad, a new study claims. The findings serve as a warning to central counterparties and regulators in their efforts to tackle the problem of procyclicality in clearing.

As volatility rises in a stressed market, CCPs call for more margin from their members to cover the risk of losses, draining liquidity from the market and