A Supplement to the Regulation of Anti-Cyclical Margin Measures of Clearing Activities

The main focus of our paper is to show how the procyclicality phenomenon on financial markets caused by the central clearing activity, should be incorporated into the initial margin calculation of the central counterparties (CCP), based on the effective regulation in the European Union, the so called EMIR. The focus will be the extension of the regulation in order to handle procyclicality efficiently. The EMIR regulation offers three possible initial margin calculation methods regarding the handling of anti-procyclicality of the CCP-s’ activity. Based on the requirements of the regulators, we use the value-at-risk model to calculate the initial margin requirements in all of the three cases. We also measure through Anti-Procyclicality Margin Measures (APC measures) the effectiveness of the treatment of procyclicality based on the latest recommendations of the European Securities and Markets Authority (ESMA). We use two APC measures to quantify the anti-procyclicality. We show how the regulation should be extended from two viewpoints: on one hand to build the required initial margin models, on the other hand in treating efficiently anti-procyclicality. We also show the shortcomings of the recommended APC measures of ESMA. We offer the regulators recommendations how to supplement the effective EMIR regulation in order to reach the goal of decreasing the procyclicality of the financial markets. The originality of the paper, that it provides an objective critique of the EMIR regulation regarding all of the three possible anti-procyclical margin calculation methods, and also of the APC measures from a practical point of view.