CCP Clearing Demystified

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.

Election returns as a signal of changing regulatory climate

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

ABSTRACTArctic and subarctic ecosystems have undergone considerable environmental changes in recent years as the result of climate warming. Fossil records of freshwater diatoms in lakes throughout the circumpolar Arctic, including the central Canadian Arctic treeline region, have revealed marked directional shifts in diatom assemblages in recent lake sediments. These algal changes have been linked to longer growing seasons, decreased duration of ice cover, and/or increased thermal stability. The effects of these recent environmental changes on higher trophic levels, such as the Cladocera, are still unclear. Using cladoceran remains preserved in the sediments of 50 lakes, which were previously examined for changes in diatoms, we show that significant changes in cladoceran species composition have occurred from pre-industrial times to the present. However, these changes are considerably muted compared to the more substantial changes observed in the diatom record. We found no consistent patterns of change in planktonic cladocerans (i.e. Daphnia, Bosmina) within our study lakes, and the response of the Cladocera to environmental changes does not appear to be strongly coupled to recent changes in diatom communities, thus further confirming that the previously observed diatom changes were related to bottom-up limnological controls. These results highlight the complex response of Arctic freshwater food webs to climate change, and the need for incorporating multi-trophic studies into climate change investigations.

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

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

Does Auditors’ Reputation ‘Discourage’ Related Party Transactions? The French Case

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.

Use of reservoir deposits to reconstruct the recent changes in sediment yields from a small granite catchment in the Yimeng Mountain region, China

Central Clearing and Collateral Demand

We use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations. We decompose collateral demand for both customers and dealers into several key components, including the "velocity drag" associated with variation margin movements. We demonstrate the impact on collateral demand of more widespread initial margin requirements, increased novation of CDS to central clearing parties (CCPs), an increase in the number of clearing members, the proliferation of CCPs of both specialized and non-specialized types, and client clearing. Among other results, we show that system-wide collateral demand is increased significantly by the application of initial margin requirements for dealers, whether or not the CDS are cleared. Given these dealer-to-dealer initial margin requirements, however, mandatory central clearing is shown to lower, not raise, system-wide collateral demand, provided there is no significant proliferation of CCPs. Central clearing does, however, have significant distributional consequences for collateral requirements across various types of market participants.

Inhibitory control (IC) is the ability to intentionally restrain initial, ineffective responses to a stimulus and instead exhibit an alternative behaviour that is not pre-potent but which effectively attains a reward. Individuals (both humans and non-human animals) differ in their IC, perhaps as a result of the different environmental conditions they have experienced. We experimentally manipulated environmental predictability, specifically how reliable information linking a cue to a reward was, over a very short time period and tested how this affected an individual’s IC. We gave 119 pheasants (Phasianus colchicus) the opportunity to learn to associate a visual cue with a food reward in a binary choice task. We then perturbed this association for half the birds, whereas control birds continued to be rewarded when making the correct choice. We immediately measured all birds’ on a detour IC task and again 3 days later. Perturbed birds immediately performed worse than control birds, making more unrewarded pecks at the apparatus than control birds, although this effect was less for individuals that had more accurately learned the initial association. The effect of the perturbation was not seen 3 days later, suggesting that individual IC performance is highly plastic and susceptible to recent changes in environmental predictability. Specifically, individuals may perform poorly in activities requiring IC immediately after information in their environment is perturbed, with the perturbation inducing emotional arousal. Our finding that recent environmental changes can affect IC performance, depending on how well an animal has learned about that environment, means that interpreting individual differences in IC must account for both prior experience and relevant individual learning abilities.

Purpose Temporary agency working continues to grow in the UK. The purpose of this paper is to look at a number of important developments in the agency industry, which generate implications for the performance of agencies, temps and the user firms in which temps work and to set out some of the key performance implications of these developments. These developments are: the increasingly complex set of contractual arrangements between agencies and user firms; the changing regulatory environment; and the changing role of agencies in pay setting. Design/methodology/approach The paper reviews the state of the art literature on agency working, and draws on 15 years of primary research and secondary analysis of the sector by the authors. Findings The paper shows that there is a proliferation of models of temporary agency worker supply, some of which involves agencies playing a greater role within firms in the management of temps, with other involving a deliberate and strategic distancing of client firms and/or agency in the day-to-day management of temps. This creates significant challenges for the management of temps. The paper also finds that there are significant tensions and challenges arising from the implementation of the Agency Working Regulations, even though these regulations have the potential to raise motivation and performance of temps. Practical implications The management of temps creates significant challenges for organisations and agencies. New models of supply of agency labour have the potential to make these challenges even more problematic, if not addressed effectively. The implications of the shifting regulatory and political environment also need closer scrutiny, particularly in the context of the recent EU referendum result in the UK. Originality/value The paper sheds light on a number of new developments in the agency sector, and by demonstrating their effects on organisations, agencies and temps, draws out some of the performance implications of the continued and changing use of agency temps.