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BoE call to extend minimum margins

Monday 24 October 2011 – by Karina Whalley

The Bank of England has called for minimum initial margin requirements to extend beyond over the counter derivatives contracts amid a bid to get the EU’s draft Emir regulation amended.

Deputy governor Paul Tucker on Monday backed a request from US Treasury secretary Timothy Geithner for margin minima to be applied across markets, but added they should remain flexible to economic changes.

“Looking ahead, we must surely establish a system that can extend beyond that ‘first base’ [of uncleared OTC derivative contracts’ requirements],” said Tucker, also member of the Monetary Policy Committee, at a conference in Brussels.

If minimum initial margin requirements are applied only to over-the-counter contracts, then exchange-traded deals could be subject to different regulation, Tucker said. If applied only to futures then the economic substance of futures could be synthesised via cash repo markets on looser terms, he added.

“Generally, we should take care to avoid regimes that give market participants incentives to choose between economically equivalent transactions and post-trade processing on the basis of different margin or haircut requirements.

“We need to be able to vary any minima as threats to stability evolve, crudely, cyclically,” explained the Bank of England deputy, speaking at a European Commission conference in Brussels.

He also called on those drafting the European Market Infrastructure Regulation to accommodate these measures in the text.

“You will recognise in this an echo of the plans for varying bank capital requirements. As a contribution to that, Emir should make explicit provision for macroprudential tools [including capital and margin requirements],” he said.

“It is not too late for Europe to lead the world in this area on macroprudential policy,” urged the Bank of England deputy governor.

Tucker also stressed the need for effective resolution regimes for central counterparties as well as other financial market infrastructure. He said the consequences for not having an orderly bankruptcy plan in place when CCP’s fail could be worse than major banks’ going bankrupt.

He warned: “There is a big gap in the regimes for CCPs. What happens if they go bust? I can tell you in a simple answer, mayhem, as bad as, conceivably worse than, the failure of large and complex banks.”

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