In a recent consultation paper, ESMA released its draft guidelines that suggested CCPs should monitor the efficiency of its APC margin measures by “first developing quantitative metrics, then monitoring the metrics on a regular basis prior to revisions in margin parameters, and reviewing its policies based on [those] outcomes”.
To ensure APC, should a CCP also consider its product offering and its risk management practices, and what they could do to limit procyclicality.
The guidelines, released on 8 January, were been designed to “ensure common, uniform and consistent application of the European Market Infrastructure Regulation (EMIR) provisions in the context of limiting procyclicality of margins”.
As part of its consultation on the guidelines ESMA asked: “Do you agree that CCPs should develop and maintain a policy for regular assessments of procyclicality of margin based on quantitative metrics?”
And, “do you find the examples of quantitative metrics for monitoring the efficiency of APC margin measures appropriate?”
These guidelines relate specifically to margining requirements featured in Article 41 of EMIR and Article 28 of the regulatory technical standards (RTS).
Article 41 of EMIR requires CCPs to regularly monitor and revise the level of margins to reflect current market conditions.
While ESMA noted that Article 28 could challenge the efficiency of anti-procyclicality margin measures because “certain approaches adopted by the CCPs did not holistically address the risk factors used in the margin computation”.
ESMA explained that this is where sudden changes could result in significant changes in the margin requirements.
Article 28 of the RTS requires that a CCP employs at least either, a margin buffer at least equal to 25 percent of the calculated margins; assign at least 25 percent weight to stressed observations in the lookback period; or, ensure that its margin requirements are not lower than those that would be calculated using volatility estimated over a 10 year historical lookback period.
ESMA will consider all comments received by 28 February 2018 and expects to publish the final guidelines in the first half of 2018.