Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/173371 
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Discussion Paper No. 2016-18
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper proposes a practical approach to address the procyclicality of initial margin at central counterparties (CCPs) that can work even in periods of extreme stress. The approach allows CCPs to limit the speed of margin increases resulting from spikes in market volatility. To maintain the desired level of risk protection, the model covers, through loss-sharing arrangements, a chosen number of the largest shares of the margin increases that are deemed procyclical. To facilitate adoption of this approach, we allow loss sharing to be capped through the allocation of bilateral credit limits. We undertake an empirical exercise to demonstrate that, even with conservative assumptions, the proposed approach can generate significant margin relief without generating losses that cannot be absorbed by clearing members.
Subjects: 
Financial markets
Financial stability
Financial system regulation and policies
Payment clearing and settlement systems
JEL: 
G
G1
G18
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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