Central counterparty anti-procyclicality tools: a closer assessment

In the new market and regulatory environment following the 2007–8 crisis, central counterparties (CCPs) need to find the right balance between ensuring the safety of their business and avoiding the creation of additional distress in the market in the form of procyclical margin calls. However, balancing these conflicting goals poses a number of challenges, and no one-size-fits-all solution appears to exist. This paper investigates whether the substantial focus placed on the procyclicality of initial margin reflects both the original concerns at the time of the crisis and the intrinsic modus operandi of CCPs. We argue that the imposition of a procyclicality framework shaped by lessons learned from securities financing and bilateral over-the-counter markets to CCPs may have created unexpected challenges. We support the idea that the best mitigation mechanisms for procyclicality may be achieved through the establishment of an outcome-based approach and the enhanced disclosure of margining practices, especially regarding intraday mark-to-market procedures and variation margin calls.