Changes in Initial Margin and Market Liquidity During the COVID-19 Pandemic

The main role of central counterparties is the clearing and settlement of trades. In order to fulfil this role, they need to maintain financial resources to cover losses due to customer defaults. One element of these resources is the initial margin requirements. In this paper the authors have analysed whether a change in the value of the margin was followed by a significant change in the market liquidity of the most liquid Hungarian stock – the OTP Bank Group – during the period of the COVID-19 pandemic. Market liquidity is measured based on the daily traded volume. The results show that in most cases, no changes in the abnormal daily traded volume are seen on the market following a margin change, which means that no evidence has been found that margin changes and traded volume are related. This result is good from a practical point of view, because it means that the activity of the central counterparty did not negatively affect the liquidity of the market during the COVID-19 period.