Mitigating margin procyclicality: the effectiveness of anti-procyclicality measures during the Covid-19 stress event

The pronounced volatility of initial margins during the Covid-19 stress event revived discussions on regulatory measures to limit potential adverse effects on market liquidity. Anti-procyclicality (APC) tools are meant to tackle this problem by dampening margin dynamics that could otherwise create liquidity strain during periods of market stress. In this paper we use daily portfolio-level data (collected under the European Market Infrastructure Regulation) to analyze the effectiveness of APC measures implemented by central counterparties for clearing member and client margins. Using simulation, we show that the effectiveness of the APC measure is highly sensitive to the details of calibration and to the type of portfolios to which the measure is applied. Employing a regression analysis, we then quantify the relative ability of APC measures to limit portfolio margin growth during the Covid-19 stress period, controlling for observed and unobserved heterogeneity. This approach reveals that models that have implemented margin floors displayed lower levels of margin growth during the Covid-19 stress. We conclude with a policy discussion on the benefits of margin model transparency and advocate for the provision of additional regulatory guidance on the implementation of APC measures.