8 - Margin and collateral

IN MY judgment," maintained William McChesney Martin, Jr., Chairman of the Board of Governors, Federal Reserve System, "we can never under the present margin regulations have the same result that occurred in terms of a financial crash in 1929 through undermargined accounts, low margins resulting in a financial debacle."' A widely used elementary economics textbook claimed, "Margin requirements have exercised an important restrictive influence on security speculation, as contrasted with the uncontrolled period of the late 1920's... Nearly everyone agrees that Federal Reserve margin requirements exercise a healthy restraint on speculative stock purchases in a boom" (Bach, 1963, p. 116). But what evidence is there that margin requirements have the effects claimed? At the December meetings of the American Economic Association, George J. Stigler, in the Presidential address, called on economists to test their assumptions that state regulation of private activity has indeed been successful (Stigler, 1965). This article brings together some data on the efficacy of margin requirements. While the figures can only be considered preliminary, and more data should be collected to test margin requirements, the data that are available and presented here indicate that not one of the aims of the legislation establishing margin requirements has been accomplished.2

Procyclicality of CCP Margin Models: Systemic Problems Need Systemic Approaches

The introduction of mandatory margining for non-cleared derivatives portfolios has major implications for the pricing and risk measurement of over-the-counter (OTC) derivatives. In particular, a model for estimating future initial margin requirements is necessary to enable the calculation of relevant pricing adjustments, net counterparty credit exposures and credit capital requirements. Existing literature on the topic suggests a model that makes use of regression techniques, but little detail is available on the predictive quality of these models within a Monte Carlo simulation framework. We review these regression-based initial margin models in detail and compare their output against the actual margin requirements measured by the International Swaps and Derivatives Association standard initial margin model (ISDA SIMM) methodology. We observe that the models generally perform well for single trades but show some degradation for larger diversified portfolios. We investigate potential extensions and improvements to the model, along with examining some additional ‘conservatism’ features that may have application in the context of credit exposure measurement. The initial margin modelling approaches discussed here are similarly applicable to centrally cleared or exchange-traded portfolios.

CCP Clearing Demystified

A simple overlapping generations model is used to characterize the effects of initial margin requirements on the volatility of risky asset prices. Investors are assumed to exhibit heterogeneous preferences for risk-bearing, the distribution of which evolves stochastically across generations. This framework is used to show that imposing a binding initial margin requirement may either increase or decrease stock price volatility, depending upon the microeconomic structure behind fluctuations in economy-wide average risk-bearing propensity. The ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs. BEYOND THEIR PRUDENTIAL FUNCTIONS, the effects of initial margin requirements on securities markets are not well understood. Many have argued, based upon empirical findings, that the level of margin requirements has no discernable impact on stock price behavior.' Nevertheless, the view that high margin requirements dampen speculative excesses and reduce excess price volatility remains popular. The simultaneous existence of such views highlights the uncertainty surrounding this issue. In fact, there exists no rigorously articulated theory of the interaction between initial margin requirements and stock prices and their returns' characteristics. In this paper we construct a simple dynamic model useful for characterizing the effects of initial margin requirements on security prices and returns. To analyze the impact of margins, we introduce investor heterogeneity into an otherwise simplified overlapping generations (OLG) economy.2 The OLG models are constructed so that each generation displays heterogeneous preferences or beliefs, the distribution of which evolves stochastically across generations. In each of two heterogeneous taste models we consider there are two types of agents, one of which is more risk tolerant than the other. In one model, the

Financial performance of sugar companies in Kenya is generally poor and has been fluctuating over a long period. The state-owned sugar companies are worse compared to the privately owned companies. The sugar sector has been orbiting around sugar scarcity, inefficiencies, failure to pay farmers, failure to renovate and modernize production unit, failure to battle with imported sugar, recurrent losses and political interference. The main objective of this study was to evaluate the effect of risk management techniques on financial performance of state-owned sugar companies in Kenya. The specific objectives guiding the study were; to establish the effect of risk avoidance on financial performance of state-owned sugar companies in Kenya, and to assess the effect of risk acceptance on financial performance of state-owned sugar companies in Kenya. The study was anchored on the risk management theory, model risk management and the theory of financial control. The study adopted a descriptive research design with a target population of fifty four respondents being employees from the six state-owned sugar companies in Kenya. Questionnaires were the main data collection tool. Data was analyzed with the help of statistical package for social science version 28, Analysis of Variances, Correlation and regression analysis tools were used to establish the relationship between the variables. The findings of the study revealed a statistically significant regression effect and indicative of accomplished prediction of financial performance of state-owned sugar factories through the F-calculated value which showed that the model was significant. Risk avoidance explained 53.9% of financial performance and risk acceptance explained 61.9% of financial performance of state-owned sugar factories in western Kenya. The findings of the study will provide an insight to finance practitioners on the risk management techniques and their relationship with organizational financial performance as well as contributing to the scholarly literature on risk management techniques in other sectors of the economy. Keywords: Risk, Risk Avoidance, Risk Acceptance, Financial Performance, Risk management Techniques

An Investigation into the Procyclicality of Risk-Based Initial Margin Models

This article investigates the relationship between initial margin requirements and stock return volatility. Volatility is measured using a GARCH in Mean model. We find no evidence of an empirical relationship between margin requirements and the volatility of the S&P 500 index portfolio's excess returns. Evidence from short-sale data, and model sensitivity analysis are presented which support the hypothesis of no margin-volatility relationship. The results are consistent with the intertemporal CAPM model of Merton (1973) with an aggregate relative risk aversion measure of 4.1. In addition, we find evidence of long-term memory in conditional return distributions' volatility.

The subject of this research is the problems of allocation of resources associated with risk management of the registry of securities holders. The object of this research is the activity of the registrars on risk management. The author examines the peculiarities of risk management techniques of registrars, and dynamics of their application for the period from 2001 to 2018. The factors that contribute to selection of one or another technique are analyzed. Special attention is given to the market insurance and reservation as management techniques, as well as to price and institutional factors that affect the choice. The article employs the methods of retrospective research of economic indicators in accordance with sampling that covers Russia’s largest registrars (in 2001-2018), as well as methods of correlation and regression analysis. As a result of the conducted research, the author determines stages in the dynamics of using the key risk management techniques. The factors of dynamics are related to the parameters of risk and relative cost of implementation of particular techniques. The author's contribution consists in the empirical research on the basis of public data of factors and trends in allocation of resources associated with risk management of registrars on the financial market for the period from 2001 to 2018. The novelty of this work lies in outlining the factors and trends in allocation of resources related to risk management of registrars in fort the period from 2001 to2018, considering public data on the activity of Russia’s largest registrars, content analysis of publications, and case law of the  computer-based legal research system “ConsultantPlus”.

Initial margin requirements represent: (1) a cost impediment to the wealth constrained investor and (2) a potential way of mitigating excessive volatility. However, prior empirical research finds that margins are not an effective tool in reducing volatility. We consider the possibility that margins primarily affect certain stocks and investors. Specifically, we test whether margins affect individuals who, as a group, we believe to be the investors most affected when margin requirements change. Our initial empirical tests, however, do not support this contention.

Volatility-Managed Portfolios of Mutual Funds

Risk is an ever‐present aspect of business, and risk taking is necessary for profit and economic progress. Speculative property development is popularly perceived as a ‘risky business’ yet, like other entrepreneurs, developers have opportunities to manage the risks they face; techniques include phasing and joint ventures. The associated areas of investment portfolio risk, development risk analysis and construction risk management have all been addressed by research. This article presents new knowledge about how developers perceive risks and the means they subsequently adopt to manage them. The developers of office projects across the UK were sent questionnaires by post. Respondents were asked about their perceptions of risks at the first appraisal stage and currently and about the risk management techniques that they had adopted. In‐depth interviews with a selection of respondents were then used to discuss and augment the findings. Developers were most concerned about market‐based risks at both stages. Concern about production‐orientated risks was lower and fell significantly between the two stages. A fixed price contract was the most common risk management technique. Risk management techniques were used more often outside London and the South East. Developer type affects both the perception and management of risk. While developers do manage risk, decisions are made on the basis of professional and business experience. These findings should help development companies manage risk in a more objective and analytical way.

The increasing demands on accelerator-based research facilities to be both reliable and cost-efficient require comprehensive risk management that takes the full scope of the facility into account. Due to the organizational and technical complexity of these facilities, a systematic risk management method is beneficial, if not necessary. However, many other aspects, aside from reliability and cost-efficiency, also call for great attention. This paper discusses the many challenges that are faced when dealing with technical risk management of accelerator facilities, as these efforts are often considered second to e.g. beam parameters and operational schedule. The paper uses the design and construction of the European Spallation Source in Sweden as a basis, but many of the contradictory aspects have been found in other similar facilities around the world. Some of the challenges for technical risk management that are discussed relate to rapid organizational expansion, pressing schedule, knowledge biases, and conflicts of interest.

Water risks and security are a major global hazard in the 21st century and it is essential that water professionals have a solid grounding in the principles of preventative risk management.The second edition of this best-selling textbook, Risk Management for Water and Wastewater Utilities, extends beyond first principles and examines the practicalities of resilience and vulnerability assessment, strategic risk appraisal and the interconnectedness of water utility risks in a networked infrastructure. It provides an up-dated overview of tools and techniques for risk management in the context of the heightened expectations for sound risk governance that are being made of all water and wastewater utilities.Risk Management for Water and Wastewater Utilities provides a valuable starting point for newly appointed risk managers in the utility sector and offers MSc level self-paced study with self-assessment questions and abbreviated answers, key learning points, case studies and worked examples.ISBN: 9781780407487 (eBook)ISBN: 9781780407470 (Print)

Introduction: This study examines the readiness for developing and implementing innovative risk management models in international tourism. The research is part of the project "International tourism in the system of economic relations: research of security and sustainability. The purpose of the study is to examine the willingness of managers in the tourism system to make decisions regarding risk prevention and prompt elimination of the consequences of risk occurrence.Methods: A review of recent research and regulatory documents in risk management was conducted, followed by a sociological survey targeting managers from Ukraine, Estonia, and Kazakhstan. Data was collected from 255 managers in 68 companies, using anonymous questionnaires to assess their familiarity and engagement with risk management techniques in international tourism.Results: The study revealed varying levels of risk management expertise among managers: 14% had a low level, 43% had an average level, 19% had sufficient knowledge, and 10% were proficient in managing risks and generating innovative ideas for risk identification, analysis, and management within the tourism sector.Conclusions: Risk management remains an undervalued yet essential aspect in international tourism, where its neglect can jeopardize valuable business ventures. This study highlights the need for enhanced risk management strategies and serves as a potential framework for broader research applications beyond the tourism industry.Keywords: digital tools, tourism business, international tourism, risk management, sociological research