Accounting Risk Interdependence Setting Margins Derivatives Markets
13 February 2014
FEBRUARY 13, 2014
Presenter: C. Pérignon, HEC Paris, Chair in Energy and Finance Research (Podcast)
Stream: Systemic Risk and Regulation (Stream 4, Track B)
Discussant: K. M. McQueen, Senior Vice President and Head, Capital Markets Risk Management, TD Bank Financial Group (Podcast)
- Pérignon presented a new methodology to set margins in derivatives markets, called CoMargin, that depends on both the tail risk of a given market participant and its interdependence with other participants. Using proprietary data from the Canadian Derivatives Clearing Corporation (CDCC), the study shows that CoMargin outperforms existing margining systems. The results show that the margins have to increase in order to prevent systemic risk.
- McQueen mentioned that it is a good idea to include interdependence into the margin but the increase is too significant (i.e. almost 100%). The study has to include more parameters (such as profit) in order to avoid the simple result that increasing the margin to the maximum will decrease the risk. The cost, when CoMargin is applied across all CCPs could be significant and this added cost needs to be assessed in the context of the risk being mitigated.