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Investigating initial margin procyclicality and corrective tools using EMIR data

Author

Listed:
  • Cominetta, Matteo
  • Grill, Michael
  • Jukonis, Audrius

Abstract

Initial margin (IM) reduces counterparty credit risk in derivative markets. Notwithstanding efforts to limit potential procyclical effects of IM-setting practices, there is an ongoing debate about whether the current framework sufficiently addresses this concern, in particular when Value-at-Risk (VaR) models are used for setting IM. This article provides further insights into this issue. First, using EMIR data, we provide an overview of outstanding IM in the euro area derivative market and identify the most relevant sectors for the exchange of IM. Second, using a VaR IM model in line with industry practice, we show that aggregate IM can potentially vary substantially over a long-term horizon. Finally, we show that an IM floor based on a standardised IM model could be an effective tool for reducing IM procyclicality. JEL Classification: G10, G23, G28

Suggested Citation

  • Cominetta, Matteo & Grill, Michael & Jukonis, Audrius, 2019. "Investigating initial margin procyclicality and corrective tools using EMIR data," Macroprudential Bulletin, European Central Bank, vol. 9.
  • Handle: RePEc:ecb:ecbmbu:2019:0009:5
    Note: 1280809
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    Citations

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    Cited by:

    1. Lannoo, Karel & Thomadakis, Apostolos, 2020. "Derivatives in Sustainable Finance," ECMI Papers 29791, Centre for European Policy Studies.
    2. Injun Hwang & Baeho Kim, 2022. "A systemic change of measure from central clearing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(9), pages 1738-1754, September.

    More about this item

    Keywords

    derivatives; financial markets; regulation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

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