Regulators Propose Policies to Boost Financial Market Robustness

In a bid to fortify the robustness of global financial markets during periods of severe stress, such as the COVID-19 lockdowns and Russia’s invasion of Ukraine, worldwide securities and banking regulators have proposed a series of measures. The Basel Committee, International Organization of Securities Commissions (IOSCO), and the Committee on Payments and Market Infrastructures (CPMI) have suggested the implementation of ten policy proposals.

Addressing Market Volatility

These proposals aim to circumvent the challenges faced by market participants during the surge in margin calls, which were triggered by volatility in commodity prices. Among the propositions, the regulators suggest ensuring adequate margin to secure trades, improving the transparency of margin calculation models used by clearing houses, and enabling market participants to better predict margin increases.

Tools for Margin Prediction

Additionally, they call for the creation of tools that would enable users to simulate possible margin variations during strained conditions. They also recommend a standardized metric to gauge the sensitivity of initial margin to price instabilities. The regulators underscore the necessity for intermediaries such as banks to provide their clients with increased transparency concerning margin calls.

Unpredictability and Clearing Houses

According to the consultation document, less than fifty percent of intermediaries can currently forecast margin increases from clearing houses accurately. During the liquidity crisis, some clearing houses even bypassed their margin models, leading to further unpredictability. The proposed measures aim to clarify the conditions under which clearing houses can exercise their discretion to override models, while preserving their ability to react to unanticipated events.

Consultation and Implementation

The consultation period will remain open until mid-April, following which the final rules will be published. Countries that are members of these regulatory bodies have pledged to incorporate the agreed standards into their national regulations, thereby further strengthening the resilience of the global financial system.