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Procyclical variation margins in central clearing

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  • Jin, YangKyu
  • Suh, Sangwon

Abstract

This study analyzes the effect of asset prices on the daily exchange of profit and loss from derivatives contracts in central clearing, called variation margin (VM). It provides empirical evidence that the VM exhibits a high volatility and a significant relation to changes in market prices. The magnitude of VM procyclicality has significant implications for systemic risk. This study analytically shows that an internal loan facility can reduce liquidity hoarding and external funding during stress periods and thus contribute to contain systemic risk. In addition, this study proposes a new scheme called the posting of variation margin in securities (PVMS) clause as an example of internal loan facility between the contract counterparties. The PVMS can replace cash VM payments with collateral posting in times of market stress.

Suggested Citation

  • Jin, YangKyu & Suh, Sangwon, 2024. "Procyclical variation margins in central clearing," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:ecofin:v:70:y:2024:i:c:s1062940823001626
    DOI: 10.1016/j.najef.2023.102039
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    References listed on IDEAS

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    More about this item

    Keywords

    CCP; Variation margin; Initial margin; Procyclicality; Systemic risk;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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