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Margin Requirements and Policy Implications

OCTOBER 6, 2015


Following the financial crisis, the role of central clearing platforms (CCPs) has significantly evolved. The 2010 Dodd-Franck law and the Volker rule have increased the number of financial operations that have to be cleared by CCPs. With these changes, regulators have also added margin requirement constraints to CCPs to decrease default risk.

In a recent research workshop, Dr. Anannit Sumawong presented a new simple margin model to calculate margin requirements that has a lower exposure to model risk. This model is as effective as the current model used to calculate margin requirements but only requires two parameters.

With CCPs becoming increasingly central, research on margin requirements is very important. Margin requirements must be high enough to safeguard against default risk and ensure that CCPs continue to be the central counterparty. However, requirements must also be low enough to allow for other investments.  Dr. Sumawong’s research demonstrates that model risk can be reduced and adding an appropriate buffer increases the stability of the margin requirements.