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Clearing refers to a key leg of a stock, bond or derivatives
trade, ensuring the transaction is completed even if one side of
the deal goes bust.
Europe's leading clearers are operated by Deutsche Boerse,
Euronext , London Stock Exchange Group and the Intercontinental
Exchange.
Markets were volatile in March and April 2020 when economies
first went into lockdowns to fight the unfolding pandemic,
triggering margin calls.
The European Securities and Markets Authority (ESMA) said that
while clearers performed well overall during the early stages of
the COVID-19 crisis, the surge in margins, or cash required to
back trades against defaulting, may have worsened market stress.
"The surge in initial margin observed has raised questions as to
whether some increases... may have acted in a procyclical
manner... and therefore should be mitigated through regulatory
or supervisory measures," ESMA said in its consultation paper.
Pro-cyclicality refers to inadvertently exaggerating market
stresses, such as by requiring everyone to find more cash to
back trades at the same time.
ESMA proposed that clearers should be more transparent in how
they review margin calls by first seeking advice from
representatives of clearing members and clients.
It also proposed that clearing houses assess how changes in
margins could amplify market turmoil, using metrics such as
specific time periods.
Clearing houses did not respond to the same extent to market
stresses in 2020, but suggesting a cap or "speed limit" on
margin calls could be potentially harmful, the watchdog said.
"ESMA believes it is therefore premature to introduce such
provisions at this stage but reserves itself the right to
consider further changes once policy discussions have progressed
at the international level," it said.
(Reporting by Huw Jones; Editing by Tomasz Janowski)
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