Better anti-procyclicality? From a critical assessment of anti-procyclicality tools to regulatory recommendations

Thomas Siegl and Daniel Steinberg

Abstract

In the aftermath of the 2007–9 global financial crisis, the regulation of the financial industry was the focus of the regulators in many countries. Alongside the clearing mandates, the European Markets Infrastructure Regulation (EMIR) seeks to mitigate procyclical behavior of the central counterparty margins in times of crisis or stress. The regulations are known as anti-procyclicality (APC) tools. Such tools are used by most central counterparties worldwide. We conduct a critical assessment of the existing APC tools from both a qualitative perspective and a quantitative perspective. We calibrate and compare initial margin models and derive APC results for a representative Deutscher Aktienindex (DAX) portfolio in Germany. This quantitative assessment is complemented by qualitative policy recommendations toward more effective APC tools that extend beyond initial-margin-based approaches (such as improved transparency, collateral eligibility, clear definitions of procyclicality) and the reconsideration of the loss distribution within the clearing system.