Regulators should set ‘guidelines’ for CCP margins – Kemp

Citi’s former clearing head says CCPs are still competing on margin

Jerome Kemp

Click here to read’s full interview with Jerome Kemp. 

One of the clearing industry’s most influential voices is calling on regulators to pay closer attention to margin levels at central counterparties (CCPs), which he suggests were too low going into the Covid-19 crisis and rose too quickly when margins became stressed.

“I think regulators could think about setting – I don’t want to call them standards – but setting guidelines relative to the overall establishment of margin models,” says Jerome Kemp, Citi’s former clearing head.

“You can end up with different standards for similar products at different CCPs, and while CCPs will swear on a stack of bibles that they never compete on margin, in essence they do.”

Kemp, who retired in September, held senior clearing roles at JP Morgan and Citi during his 36-year career in finance. Until recently, he was also chair of the FIA, the futures industry’s lobby group.

The adequacy of contract margins, especially at futures and options clearing houses, has been questioned by several of the world’s largest clearing banks – and even by some CCPs – in the wake of the extreme volatility witnessed in March. Economists at the Bank for International Settlements subsequently suggested that the procyclicality of the massive initial margin increases at large CCPs had the potential to put “undue pressure on clearing member banks exactly at the wrong time”.

Futures margin requirements rose sharply during March and April. At CME, margin rates for WTI Crude Oil jumped 1,145% over this period, while rates for the S&P 500 index and 30-year US Treasury bonds increased 176% and 120% respectively. Other CCPs took similar measures, with JSCC doubling margins on benchmark Japanese Nikkei 225 futures between February 28 and March 16.

You can end up with different standards for similar products at different CCPs, and while CCPs will swear on a stack of bibles that they never compete on margin, in essence they do

Jerome Kemp

Speaking with in March, CME’s chief risk officer, Lee Betsill, defended its margining practices, noting that the oil and equity price moves in March and April were the largest in decades.

CCP margins are not designed to cover the most extreme market moves – if we did, margin rates would risk becoming too expensive and potentially damaging liquidity,” he said.

Kemp concedes that new regulatory guidelines might make it “more expensive to pay up for initial margin”, but that the degree of coverage will ensure the market remains liquid during periods of volatility.

Hester Serafini, head of Ice Clear Europe, suggested in June that margins for the contracts it clears did not increase as rapidly compared with other CCPs: “If I look at individual contracts, the average increase in March, it’s about 30%. I would say the anti-procyclical models that we use at Ice to try to avoid ramping up margins in volatile periods are working quite well.”

Ice and CME have declined to comment for this article.

Margin requirements for over-the-counter derivatives were generally more stable in the first quarter. These are calculated with a minimum five-day holding period, which assumes it will take five days to resolve a defaulted portfolio. At listed CCPs in Europe, the standard is a two-day holding period, while it’s one day in the US.

Margin standards and methodologies across CCPs and products also differ in other ways. For instance, US CCPs must gross up the margin of client accounts even when there are offsetting positions, while European CCPs are allowed to net exposures. Lookback periods, which help determine margin levels, also vary, as do margin floors.

Kemp takes particular issue with OTC behemoth LCH SwapClear’s practice of making multiple intraday initial margin calls, which he argues can create significant liquidity pressures on futures commission merchants during times of stress. He also wants to see the scrapping of certain additional margin top-ups that LCH calls for from its largest members, saying this goes against the principle of “defaulter pays”.  

“The entire infrastructure there [at LCH] is ripe for review,” says Kemp.

LCH has declined to comment.

In a wide-ranging interview, shortly to be published by, Kemp discusses his ideas on reforming clearing houses and looks back at this career at Citi, JP Morgan and at a small Paris-based brokerage.

He announced his retirement from Citi in July, although Kemp’s last day was September 16. He was replaced by Chris Perkins and Sabrina Wilson, who have become co-heads of FCX – Citi’s combined OTC clearing, futures and options and FX prime brokerage business. Perkins was formerly the head of Citi’s OTC clearing and FXPB business, while Wilson was European head of FCX and global head of FCX electronic execution.

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