Saying How Versus Saying What – The Choice of Regulatory Style in Margin Policy

Abstract

Mandatory margin posting on derivatives portfolios is one of the key elements of post-2008 derivatives policy. Margin requirements often calculated using risk-based models. These models typically require more margin when markets are more stressed. This can create liquidity burdens on market participants just when they are hardest to meet. There are two main approaches to addressing this: requiring that particular tools to reduce variability are incorporated in all margin models; or placing limits on the variability of margin regardless of how it is calculated. This choice is practically important and leads to insights on differences in regulatory style.

Keywords: Central clearing, margin procyclicality, anti-procyclicality tools, initial margin, regulatory style, derivatives regulation

JEL Classification: G17