Margin calls on eurozone funds increased fivefold in March

Investment funds made over €10 billion ($11 billion) in variation margin (VM) payments to derivatives counterparties in the week beginning March 16, up from an average of €2 billion a week throughout the first half of February, partial data from the European Central Bank (ECB) shows.

The absolute value of VM payments that week was likely far higher, and could have peaked at €40 billion on March 16. The ECB estimates rely on data gathered under the European Markets Infrastructure Regulation (Emir), which is spotty.

The Emir data shows the jump in VM payments was most severe for equity derivatives, which saw calls increase x6.5 times over the mid-February average.


For over 25% of funds surveyed, the VM calls exceeded their pre-stress cash positions on at least one day in the midst of the coronavirus-inspired turmoil, the ECB found. This means some funds could have struggled for liquidity in the week beginning March 16.

However, the agency noted that many funds would have received an influx of cash from VM owed them by derivatives counterparties ahead of the stress, adding to their available liquid resources.


What is it?

The ECB produces a biannual Financial Stability Review, which offers an overview of potential risks to financial stability in the euro area.

The report on VM payments by funds uses transaction-by-transaction derivatives data collected under Emir, enriched by a sector classification, and data on the liquid holdings of funds. Emir data covers both over-the-counter exchange-traded derivatives and both centrally and non-centrally cleared trades.

Why it matters

The cash demands made of funds holding derivatives in March may have exacerbated the painful price declines some suffered. The ECB found that 10% of equity and hedge funds experienced liquidity strains over a “prolonged period” from margin calls, and in some cases these may have exceeded cash demands from other sources, such as investor redemption requests.

Faced with big VM calls, the funds in question would have had to unwind their positions or sell other assets at fire-sale prices to meet them. The turmoil experienced in March, coupled with the ECB findings, may prompt funds to build up their cash buffers to ensure they could meet a similar period of jumbo margin calls without distress.

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