How must a CCP manage liquidity, and how can margins fuel leverage?

A CCP must be able to pay on time even when a clearing member does not. Article 40 requires it to measure and assess its credit and liquidity exposures to every clearing member, and to any CCP it has an interoperability link with, on a near to real-time basis; the exam material words this as near-time or real-time. It needs timely access to the relevant pricing sources, on a non-discriminatory basis and at a reasonable cost, so that it can measure those exposures properly.

Under Article 44 a CCP must always be able to draw on adequate liquidity for its services and activities. It arranges credit lines or similar facilities to cover its needs when the resources at its disposal cannot be used immediately. To avoid dependence on one banking group, the credit lines from any one clearing member, counted together with those from its parent undertaking and subsidiaries, may not exceed 25% of what the CCP needs. The CCP measures its potential liquidity needs every day. The exam material says that measurement assumes that the two clearing members to which the CCP is most exposed default. Since 24 December 2024 EMIR 3 has required the CCP to assume the default of at least the two entities to which it has the largest exposures and that are clearing members or liquidity providers, central banks excluded.

The exam material also says a CCP can draw liquidity from a central bank, from creditworthy and reliable commercial banks, or from both. It adds that a CCP should consider, above all in stressed conditions, the danger of depending on commercial bank credit lines alone. That wording comes from recital (71) of EMIR, which explains the Articles rather than adding a rule of its own. The binding detail is in Delegated Regulation (EU) No 153/2013: a liquidity risk framework with daily monitoring, a list of eligible liquid resources (such as cash, committed credit lines and repos, and highly marketable instruments convertible into cash the same day) and limits on concentration in liquidity providers. The exam material cites Article 41 alongside Article 44 for liquidity; Article 41 in fact governs margins, and Article 40 is the exposure rule.

The exam material's text on leverage is a policy explanation rather than a set of EMIR rules. Its point is that collateral requirements which move with the cycle can feed excessive leverage and so create systemic risk, which macroprudential tools aim to contain. Margins and haircuts protect CCPs and bilateral counterparties by absorbing losses, but they can also make the financial cycle swing harder. Two effects combine. When asset prices rise, securities already posted as collateral are worth more, so fewer are needed to secure the same exposure. And because most margin and haircut models are driven by price volatility, requirements fall when markets are calm and rise when volatility jumps.

In a calm, rising market both effects free up collateral, which firms can use to borrow more and to take on larger derivative commitments, building up financial and synthetic leverage. When prices turn, the process reverses: collateral loses value just as margin calls and haircuts increase. Firms that cannot meet the calls must close positions and sell assets quickly, and these fire sales push prices down further, triggering more calls. That is procyclicality: requirements that move with the cycle and amplify it. The exam material presents this as a focus of 'the current revision of EMIR'; the rules in force today include EMIR 3, applicable since 24 December 2024.

Under Article 41(1), a CCP's margins must cover losses from at least 99% of exposure movements over an appropriate time horizon, and the CCP must revise them taking account of any procyclical effects of the revisions. For OTC derivatives, Delegated Regulation (EU) No 153/2013 raises the 99% to 99.5%. Since 24 December 2024 the CCP must monitor and revise its margins continuously, not just regularly. Article 28 of Delegated Regulation (EU) No 153/2013 makes the CCP use at least one of three tools: a margin buffer of at least 25% that it may run down when requirements rise sharply; a weight of at least 25% for stressed observations in the lookback period; or a floor equal to margins calculated with volatility over a 10-year lookback. Since 24 December 2024 EMIR itself also requires a CCP revising its haircuts to take account of the need to minimise procyclical effects (Article 46(1)); Delegated Regulation (EU) No 153/2013 already required conservative haircuts that limit procyclicality. EMIR has always required intraday margin calls, at least when set thresholds are exceeded. Since 24 December 2024 the CCP must also consider, as far as possible, how those calls affect participants' liquidity. For uncleared trades, initial margin models under Delegated Regulation (EU) 2016/2251 must draw at least 25% of their data from a period of significant financial stress. How investment firms manage their own liquidity and leverage risk is covered in What processes must a CIF have for credit, market, liquidity, operational and leverage risk?