BoE reports spike in margin calls during COVID market disruption
11 June 2020 London
Image: lazy llama/Shutterstock.com
In the height of the COVID-19 market disruption in March, daily variation margin calls by UK central counterparties (CCPs) in derivatives markets were around five times the average daily margin calls for January and February, a new report by the Bank of England (BoE) finds.
Variation margin reflects day-to-day changes in the market value of derivatives contracts and is therefore directly affected by increased volatility in share prices, as was seen in Q1 when the extent of the COVID-19 pandemic in the UK became clear.
As markets reacted to the spread of the disease in March, BoE data shows that some markets saw their largest price moves in 30 years, leading to significant spikes in the margin required to buffer participants against counterparty credit risk.
According to the BoE, gross variation margin calls on centrally cleared derivatives
rose considerably between 6 March and 24 March.
At its highest, on 18 March, variation margin calls were more than five times the average seen in the opening months of the year. Since April, margin calls have bobbed at slightly above average.
The report also notes that variation margin calls also increased for derivatives not cleared by CCPs.
Meanwhile, at its peak in March, initial margin required by UK CCPs increased 31 percent compared to the average requirement earlier in 2020.
Initial margin protects against potential future changes in the market value of contracts following a counterparty default.
鈥淥verall, margin helped to ensure derivatives markets remained resilient throughout the recent market shock. It also resulted in a large movement of liquidity around the financial system,鈥� the BoE report explains. 鈥淭his contributed to a 'dash for cash' in March 2020, as some market participants appeared to have insufficient buffers of cash-like assets to meet actual or anticipated margin calls.鈥�
Variation margin reflects day-to-day changes in the market value of derivatives contracts and is therefore directly affected by increased volatility in share prices, as was seen in Q1 when the extent of the COVID-19 pandemic in the UK became clear.
As markets reacted to the spread of the disease in March, BoE data shows that some markets saw their largest price moves in 30 years, leading to significant spikes in the margin required to buffer participants against counterparty credit risk.
According to the BoE, gross variation margin calls on centrally cleared derivatives
rose considerably between 6 March and 24 March.
At its highest, on 18 March, variation margin calls were more than five times the average seen in the opening months of the year. Since April, margin calls have bobbed at slightly above average.
The report also notes that variation margin calls also increased for derivatives not cleared by CCPs.
Meanwhile, at its peak in March, initial margin required by UK CCPs increased 31 percent compared to the average requirement earlier in 2020.
Initial margin protects against potential future changes in the market value of contracts following a counterparty default.
鈥淥verall, margin helped to ensure derivatives markets remained resilient throughout the recent market shock. It also resulted in a large movement of liquidity around the financial system,鈥� the BoE report explains. 鈥淭his contributed to a 'dash for cash' in March 2020, as some market participants appeared to have insufficient buffers of cash-like assets to meet actual or anticipated margin calls.鈥�
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