On May 10, ISDA and the Institute of International Finance (IIF) responded to a discussion paper on variation margin (VM) practices by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).

The associations are supportive of the effective practices on frequency, scheduling and timing, pass through of VM, excess collateral and transparency from central counterparties (CCPs) to clearing members (CMs), which would foster market participants’ readiness for above-average VM calls. On effective practice 8 on transparency from CMs to clients on intraday VM calls, the response highlights that most CMs do not pass on intraday VM calls to their clients and this information would therefore not be relevant.

Streamlining intraday VM processes should focus on limiting the amount of liquidity that is trapped at the CCP intraday. Achieving this objective would not only help market participants’ liquidity preparedness, but would also mitigate the risk that intraday VM calls act as an amplifier in stress circumstances, thereby reducing systemic risks.

On the effective practices proposed by CPMI-IOSCO, the response notes:

• The preference of CMs is for scheduled (rather than unscheduled) intraday VM calls. CCPs should discuss the approach to scheduling intraday VM calls with CMs through consultation with the CCP risk committee or other committees, such as risk working groups.
• Wherever practically possible, CCPs should endeavor to pass through intraday VM to reduce the amount of liquidity that is trapped during the day in times of high volatility. If CCPs do not pass through intraday VM, then market participants should be allowed to meet intraday VM calls with a wider set of collateral. CCPs that do not pass through intraday VM should explore solutions such as effective practice 3, allowing market participants to offset VM payments against other payment flows, where practical. The associations suggest a similar practical solution whereby participants that are owed intraday VM would be allowed to offset this amount against their initial margin requirements.
• In developing these effective practices, the associations see value for CCPs to explain how their intraday VM arrangements have been designed in light of paragraph 5.2.26 of the CPMI-IOSCO CCP resilience guidance, which states that a CCP should consider how intraday VM arrangements “interact with other components of its margin system and how it can, to the extent practicable and prudent, limit the potential for liquidity implications”.

With regards to other potential effective practices not outlined in the report, both associations highlight that initiatives aimed at reducing frictions in collateral operations would help to mitigate the liquidity impact of intraday VM calls. Wider adoption of a standardized collateral representation framework, such as the Common Domain Model, should be encouraged.

The response covers the positions of buy- and sell-side members. The paper does not reflect the views of many CCPs, and many of the CCPs are in disagreement with the views.