The Committee on the Global Financial System (CGFS) today published a report entitled The role of margin requirements and haircuts in procyclicality prepared by a Study Group chaired by David Longworth, deputy Governor of the Bank of Canada.
The report reviews the system-wide impact of haircut-setting and margining practices in securities financing and over-the-counter derivatives transactions during the financial crisis. Based on that experience, it explores complementary policy options for reducing the procyclical effects of those practices on financial markets.
The report recommends several enhancements to market practices to dampen the build-up of leverage in good times and soften the system-wide effects during a market downturn. Complementing those options, it also recommends considering measures that involve countercyclical variations in margins and haircuts, and enforcing higher and relatively stable through-the-cycle haircuts for securities financing transactions.
CGFS chairman Donald L Kohn said that he anticipates that this report will inform policy deliberations on how to reduce financial system procyclicality.