Research

In recent years, many derivatives market participants received large margin calls in episodes of elevated market volatility such as the onset of the Covid-19 global pandemic and the illegal Russian invasion of Ukraine. The lack of some market participants’ preparedness to meet margin increases resulted in liquidity stress and reinvigorated the policy debate about how reactive margin should be to changes in market conditions. This debate has been hampered by the lack of a generally accepted way of measuring the reactiveness of the models used to calculate initial margin. The first contribution of this paper is to provide such a measure. We consider a step function in volatility, and examine the responses of various initial margin models to paths of risk factor returns consistent with this impulse, introducing the impulse response function as a convenient means of presenting this reaction.