16 April 2024

BCBS Secretariat
[email protected]

CPMI Secretariat
[email protected]

IOSCO Secretariat
[email protected]

Re: BCBS-CPMI-IOSCO consultative report dated January 2024 on transparency and responsiveness of initial margin in centrally cleared markets (the “Consultative Report”)

Dear Secretariats:

The Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG” or “AMG”)1 appreciates the important work of BCBS, CPMI, and ISOCO (collectively, the “Supervisory Authorities”) building on the analysis of margin calls during the March 2020 period of high market volatility (“March 2020”). SIFMA AMG also appreciates the extensive work of the Supervisory Authorities to conduct detailed surveys of central counterparties (“CCPs”), CCP members (“clearing members”) and market participants (“clients”) to collect quantitative and qualitative data across centrally cleared and non-cleared markets with respect to margin experiences during and after March 2020.2

I. General Observations:

We take a sober view of the experiences of March 2020. For while it is true that cleared markets functioned without widespread defaults, the sudden dramatic increases in initial margin (“IM”) – while reflecting the increase in risk – demonstrated the need to examine margin practices generally and made abundantly clear the toll such sudden, dramatic increases can have on overall market liquidity. And while overall IM levels rose, IM levels for certain products shot up more than 100% instantly. This sudden dramatic shift was a challenge to digest, difficult to predict, and impossible to manage given the limited transparency into CCP margin practices.

Margin models must be transparent so that clearing members and clients can anticipate calls. We note that as the CCPs are generally single providers in the products that they clear, there is no benefit in being less than fully transparent as to the basis of margin determinations. “Transparency” means, at a minimum, that clearing members and clients have sufficient insight into the margin model used by a CCP so that an individual firm can understand how the model reacts to market conditions and can assess with some reasonable degree of certainty whether it will be subject to a margin call and in what amount.

SIFMA wants to emphasize that good practices, metrics, and disclosures must be embodied in effective baseline anti-procyclicality (“APC”) requirements tailored for products and markets, with such APC tools required to be reviewed and adjusted as conditions require. While most CCPs already have APC measures in place in response to the CPMI-IOSCO Principles for Financial Market Infrastructures (“PFMIs”) recommendations, the experiences of March 2020 make it abundantly clear these measures are inadequate – both in concept and in application. And particularly in light of the relatively muted IM volatility demonstrated in the less standardized and less liquid non-cleared market; it is plain that more effective APC controls are not only possible but have demonstrated effectiveness.

It is for these reasons that SIFMA AMG agrees with the policy proposals set forth in the Consultative Report and recommends that such proposals be incorporated in regulations governing CCPs where appropriate. In this letter we will respond to questions more closely related to our members, clearing member clients, and their perspectives on relevant issues.

1 SIFMA AMG brings the asset management community together to provide views on policy matters and to create industry best practices. SIFMA AMG’s members represent U.S. and multinational asset management firms whose combined global assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.

2 SIFMA AMG and its members have been consistently involved in the efforts to increase the strength and resiliency of cleared markets, consistently recommending enhancements to CCP governance and transparency, capital structure, and margin practices. With respect to the work of the Supervisory Authorities, SIFMA AMG has submitted several detailed letters addressing issues related to margin in the derivatives markets: Letter dated March 25, 2020, to the Supervisory Authorities from SIFMA AMG and other trade associates addressing margin requirements and the impact of COVID-19; Letter dated January 26, 2022, to the Supervisory Authorities addressing the consultative report on review of margin practices; Letter dated October 3, 2022, to the Supervisory Authorities from SIFMA AMG addressing CCP non-default loss practices; Letter dated October 13, 2022, to the SEC from SIFMA AMG addressing governance requirements for CCPs; Letter dated December 23, 2022 to the SEC from SIFMA AMG addressing the proposed mandate for the clearing of U.S. Treasury securities; and Letter dated September 26, 2023, to the SEC and CFTC from SIFMA and SIFMA AMG addressing CCP margin, recovery, and wind-down plans.