{"id":"circulars/cssf-20-761","title":"Circular CSSF 20/761","type":"circular","date":"2020-12-11","kind":"circular","html":"<p>Circular CSSF 20/761 is a CSSF circular on liquidity risks arising from margin calls, published 11 December 2020.</p>\n<p>Relevant for: Credit institutions, Investment firms, Management companies - Chapter 15, Management companies - Chapter 16, Part II UCIs, UCITS.</p>\n<p>Main topic: EMIR. Keywords: Financial counterparty (FC), Macroprudential instrument, Non-financial counterparty (NFC).</p>\n<h2>Text</h2>\n<p>Luxembourg, 11 December 2020</p>\n<p>Ladies and Gentlemen,</p>\n<p>To all clearing members and</p>\n<p>On May 25th 2020, the ESRB published a recommendation (with reference</p>\n<p>ESRB/2020/6) on liquidity risks arising from margin calls. This recommendation has</p>\n<p>all</p>\n<p>financial</p>\n<p>and</p>\n<p>financial counterparties</p>\n<p>non-</p>\n<p>several implications for the CSSF as a competent authority in charge of the supervision of clearing members and of financial and non-financial counterparties in Luxembourg. The definition of clearing members and of financial and non-financial counterparties follows regulation EU 648/2012. The law of 15th of March 2016 clarifies the respective powers granted to the Luxembourg supervisory authority of the financial sector (Commission de Surveillance du Secteur Financier - CSSF) in the context of Regulation 648/2012/EU (the European Market Infrastructure Regulation - EMIR). The ESRB recommendation ESRB/2020/6 attempts to address liquidity risks stemming from margin calls, in the context of volatile markets and uncertain collateral valuation. A large part of the recommendation concerns central counterparties (‘CCPs’) and their supervisors, while some sub-recommendations are also addressed to clearing members, financial and non-financial counterparties and their supervisors. All types of entities, CCPs, clearing members, financial and non-financial counterparties are defined in accordance with regulation EU 648/2012. The main objective of the recommendation is to limit cliff effects in relation to the demand for collateral and to limit liquidity constraints related to margin collection. As</p>\n<p>highlighted</p>\n<p>the</p>\n<p>recommendation,</p>\n<p>central</p>\n<p>clearing</p>\n<p>derivatives</p>\n<p>and</p>\n<p>collateralisation of non-centrally cleared derivatives positions is essential to financial stability. The outbreak of the Covid-19 pandemic resulted in significant margin calls across centrally cleared and non-centrally cleared markets. CCPs have issued calls for and collected large amounts of intraday variation margin with the corresponding payout often occurring only the next morning and causing liquidity to be temporarily held on the accounts of the CCPs. On the other hand, many clearing members faced liquidity constraints as initial margin calls increased. Looking ahead, the ability of market participants to cover margin calls will depend on volatility levels and on the resilience of their liquidity management. With this recommendation, the ESRB seeks to ensure that decisions in terms of risk management do not lead to excessive procyclical features, thus unintentionally creating liquidity strains that could develop into solvency issues.</p>\n<p>This would imply that sudden and significant changes and cliff effects relating to initial margins and collateral would be limited: i) by CCPs vis-à-vis their clearing members, ii) by clearing members vis-à-vis their clients and iii) in the bilateral sphere. It further implies that CCPs, while maintaining their financial resilience avoid excessive liquidity constraints for clearing members and that clearing members do so for clients. The CSSF intends to comply with the ESRB recommendation and recommends that Luxembourg clearing members and Luxembourg based financial and non-financial counterparties apply the principles described in the paragraphs below. a) Recommendations to clearing members 1. It is recommended that, clearing members, when providing clearing services to their clients, apply risk management procedures that do not result in sudden and significant changes and cliff effects in margin calls and in the collection of margins, unless these sudden and significant changes are an inevitable result of market events.</p>\n<p>The text above is the opening of the document; the PDF carries the whole.</p>\n<p><a href=\"https://www.cssf.lu/en/Document/circular-cssf-20-761/\" target=\"_blank\" rel=\"noreferrer\">Document page</a>, <a href=\"https://www.cssf.lu/wp-content/uploads/cssf20_761eng.pdf\" target=\"_blank\" rel=\"noreferrer\">PDF</a>. Source: Commission de Surveillance du Secteur Financier (CSSF), reproduced with the CSSF's consent. The French text prevails.</p>"}