FRM Part II · FRM Exam Part II · Central Clearing
A risk manager reviews a CCP's margin model and observes that initial margin falls sharply during a long calm period and then rises abruptly when volatility spikes, forcing members to post large amounts of liquidity at the worst time. Which measure would most directly reduce this procyclicality?
A margin floor tied to long-run stressed-period volatility, or a buffer built in calm periods, best reduces procyclicality. It keeps initial margin from collapsing in quiet markets, so increases in stress are smaller. Shortening the lookback window does the opposite by making margins react faster to recent volatility.
- AMoving from daily to intraday variation margin calls only
- BApplying a margin floor based on a long-run stressed-period volatility, or a buffer that is built up in calm periodsCorrect
- CShortening the lookback window of the margin model to react faster to recent data
- DAllowing members to post only cash as eligible collateral
Explanation
Procyclicality is dampened by anti-procyclicality tools such as a floor based on long-run or stressed volatility, or a buffer accumulated in calm periods that can be released in stress. A shorter lookback makes margins react faster and worsens procyclicality. Intraday VM calls and cash-only collateral do not smooth initial margin levels.
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