7  https://www.oecd.org/g20/summits/pittsburgh/G20-Pittsburgh-Leaders-Declaration.pdf 7  All speeches are available online at www.bankofengland.co.uk/news/speeches  7  The aim of the reforms was to ensure that derivatives trades were prudently, transparently and efficiently collateralised.8 The reforms also aimed to ensure that collateral could adjust as smoothly and predictably as possible if asset prices changed sharply in times of stress. Clearing through central counterparties provided a degree of mutualisation of counterparty credit risk. It also provided greater efficiency through the ability of central counterparties to ‘net off’ opposing flows of margin payments to market participants, reducing the gross liquidity flows around the system that would result from a network of bilateral trades. Derivatives markets went into the COVID crisis with much greater underlying collateral in the system to protect against counterparty credit failure - with at least $ in additional collateral against OTC derivative exposures.9  As financial market asset prices adjusted very sharply in March, margin call, the increasing collateral required to protect against counterparty credit failure, went up sharply also.10 These margin calls were met in the UK and there were no defaults. With one or two small exceptions, the same picture was true internationally. It is clear however that the need to post additional margin generated sharp liquidity pressure on those on the ‘wrong’ side of derivatives exposures, adding to demand for liquidity in the system. There are two types of margin. CCPs collect variation margin (usually in cash) as a core part of reducing participants’ counter party credit risk as prices move.

Absent the flow of variation margin, CCPs non-defaulting members would face very substantial losses if a counterparty defaults. Variation margin is therefore vital, despite the liquidity demands it necessarily entails; and it is not that case that the post-crisis growth in central clearing has increased these demands – especially now that variation margin is routinely exchanged on non-cleared derivatives too. Indeed the vast multilateral netting sets created by CCPs substantially reduce the volume of variation margin compared to the alternative where the same trades are cleared bilaterally. CCPs also collect ‘initial margin’ to protect their members from potential losses arising from a member default. In an historically large stress event, the distribution of potential of losses changes, with larger losses becoming more likely, and therefore initial margin calls increased as well. The increase in initial margin requirements at UK CCPs during the crisis was substantial [add stat] but also relatively gradual – the peak one-day increase in initial margin was considerably smaller than peak one-day variation margin flows through the crisis. This was in part due to prudent measures taken by CCPs before the crisis to prevent initial margin from falling too far in good times and prevent large or unexpected step changes in initial margin requirements when market volatility starts to rise. 9 FSB (2017) Report on effectiveness of derivatives reforms. 10 Daily variation margin payments to and from UK CCPs peaked at more than £ roughly five times the daily average in January and February.