CCPs must be able to haircut initial margin in a crisis

Debate rages over whether central counterparties should be able to apply haircuts to initial or variation margin in a crisis. Despite opposition from critics on all sides, haircutting initial margin is the best option, argues Giuseppe Insalaco, a senior adviser at the Central Bank of Ireland

Radical haircut: initial margin haircutting is a controversial topic

Giuseppe Insalaco is a senior adviser in the markets policy division at the Central Bank of Ireland

Although the European Commission has not yet published its proposed recovery and resolution legislation for central counterparties (CCPs), the debate on the subject is already raging.

That's particularly the case when it comes to haircutting initial margin, by which I mean dipping into initial margin accounts to cover liquidity requirements or even losses incurred by a CCP in distress.

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