How to Build From Strength

By: Richard Haynes and Nancy Doyle, Deputy Director, Risk Surveillance, and Senior Special Counsel, respectively, CFTC Apr 2024

Margin Transparency and Liquidity Preparedness

The Joint Steering Group on Margin’s (JSGM’s) ongoing work on cleared initial margin speaks to the value of transparency. So, we want to do our part by providing a few additional thoughts on margined markets in recent years, within the context of the recent consultative reports.

We emphasise that these reports have been released as consultations – policy proposals, not policy dictates – and we would like to know about areas where we may have gone a bit off the proper path, or perhaps wandered in an entirely wrong direction.

As you can see from the JSGM’s first report, Review of margining practices ( (Sept. 2022 “Phase I” report), there is good news to report on cleared initial margin. Even with often unprecedented moves in many benchmark products, we had no major disruptions or clearing member failures. Initial margin responsiveness across global central counterparties (CCPs) was in line with the associated price volatility and, in aggregate, margin demands on the largest and most connected clearing members represented, at most, single-digit percentages of their total available capital.

This market robustness was paired with “operational resilience.” CCPs remained active and alert, processing far higher trading volumes and position shifts than ‘business as usual’, paired with real-time risk management calls and dialogue with stakeholders. Discretion was used, at times, but we note the value of CCP flexibility in the report, especially during periods of stress. When there is the clear need for discretion, and a clear process for identifying where discretion can be used, that use may represent the optimal response to unexpected market shifts.

From our staff perspective, this data reflects, overall, a success story for the CCPs handling these market stresses.

Is there a need for initial margin transparency enhancements? 

This success may point to little acute need for major changes to the system, certainly when an individual change could bring about negative unintended consequences. However, one can build from strength, and regulators internationally, including the CFTC, have observed or been informed of possible enhancements to this strong base. As regulators of CCPs, it makes sense to explore ways of improving transparency, now informed by real-world stress-tests of cleared markets. The consultative report points to a number of efforts that were informed not just by these events, but by much helpful feedback from our earlier consultative work.

Transparency in this context is an exercise in degrees, to be sure; in this, we need to be practical and pragmatic, and, to pair with a third “p,” aware of the value of proportionality. Because of this, the consultative report asks: with these real-world stress tests and margin responses, how could initial margin transparency be enhanced further, ideally in relatively straightforward ways, at a reasonable cost?

Transparency Enhancement by Degrees 

Many of our consultation questions associated with the proposals are purposively broad – the concept of proportionality already noted, the relative balance between general and specific costs and benefits, the potential differences between participant types or asset classes. Regarding the latter, we are well aware that CCPs, as well as members and clients, are heterogeneous. This variation cuts across many dimensions: the number, the type, and the price volatility of underlying products; the region; the breakdown of common participant types, and the fundamental structure and calibration of the margin model. The list could go on, and speaks to the challenge of identifying ways in which additional transparency efforts could be effective across a set of heterogeneous CCPs and intermediaries.

This interest in constructive comment comes within the important context of the other consultative papers. The JSGM consultative report focuses on transparency related to initial margin – but, we know that, during the early pandemic period, liquidity demands related to variation margin represented multiples, often to the level of five or six times, of those related to initial margin changes. So, we should not overstate our case on the effect of improved predictability in our limited segment; this needs to be understood in its pairing with the report that speaks to variation margin practices, and the third that throws the net yet wider to uncleared markets.

To point to one example that highlights the challenges related to beneficial transparency: some insightful recent papers have shown that margin changes are highly path dependent, with permutations of even the same set of price shifts resulting in notable differences in margin movements. Additional transparency, provided in a tractable and cost-effective format, may not always provide the amount of detail and nuance to replicate each of these price-to-model relationships.

Nor, perhaps, should it. The challenges that stem from unknown risks in the marketplace are myriad and inevitable. The last few years have seen effects that run the gamut from individual price disruptions to more general stability concerns that led to active, ongoing programs by the Federal Reserve and other central banks. A more certain, and stable, world has much to be desired; however, we also don’t want to find ourselves in a place where we believe something is predictable and adequately understood, but we have instead substituted a clever model, or clever data, for the real world. We are reminded here of the surface mathematical sophistication of Long-Term Capital Management and the deep instability it eventually wrought.

Why highlight this, even while the report speaks to a number of areas where we think potential progress could be made? In part to caution (at least ourselves) against hubris. Improvements in initial margin transparency do not obviate parallel needs, needs such as establishing, and maintaining, liquidity lines that hold up under pressure or operational testing to ensure that real-time data and reporting feeds are providing transparency when and where it is needed. Financial markets have experienced a few operational risk events over the last few years, at times related to communication channels, which emphasise that market resilience is not just a transparency effort, but how and by what means communication and information is structured.

But we don’t want to sound too pessimistic. A partial focus on what can ‘go wrong’ in transparency efforts is to ensure that commendable motivations, and commendable goals, are not marred by bad thinking. The report attempts to strike a balance between the value of predictability and the inherent forces of chance, especially given the fact that CCP risk management often needs to focus on the tail of the tail of the distribution.

The report includes a number of areas where this balance is attempted, many of which highlight the trade-offs that are inherent to so many market elements. For instance, simulation tools, the focus of a few of the proposals, may be able to provide useful information on what margin demands may result from changes in portfolios or market conditions – but no tool will be able to mirror any and all potential market stresses to come. In another proposal, CCPs would be tasked with designing, and applying, a general framework for how, in their markets, they should balance factors like margin coverage, efficiency and procyclicality. These factors pull and push against each other; often an ‘improvement’ in one results in ‘costs’ for another. There is no unique optimum, but this fact does not preclude the value of thinking about how one could, and should, strike a balance. Similar descriptions could be attached to many of the other proposals.

So, we want to encourage all those who have lived and learned from past stress periods to help us with these efforts – highlighting those places where transparency is especially beneficial, or noting challenges that need to be correctly thought through. We hope, and believe, there are areas where our transparency efforts will truly improve the breadth and depth of knowledge within a complex marketplace.


We return to our initial, important, take-away from an unpredictable few years. Given the broad success of clearing, we approach the initial margin proposals for the cleared market with a desire to focus on those areas where heightened transparency in initial margin calculation and margin responsiveness can retain that market robustness.

Our intention in the recently released consultations is to build upon success, and not in any way jeopardise the currently varied CCP use of tools, including APC tools, spread across a heterogeneous set of products and circumstances. The JSGM project and report, in our view, is best framed as an enhancement of current transparency, in larger or smaller degree, an enhancement that can build from an already strong base.

The views expressed herein are the opinions, analyses, and conclusions of the authors and do not necessarily reflect the views of the CFTC Division of Clearing and Risk, other Commission staff, the Commission itself, our partners in the ongoing international margin work, or the United States Government.