On a related subject I never understood why the Fed didn't raise Reg. T requirements in 1999. The requirements have been at 50% since 1974. In the late 40's the initial margin rate was 100% while as recently as 1971 the rate was at 80%.
And yes, we know credit is fungible and that there are other ways to finance/leverage positions but you can at least set up some speed bumps on the road to perdition.
From VoxEU:
Initial margin models are often procyclical, raising margin requirements at times of market stress, which can exacerbate that stress. This column proposes quantitative measures of procyclicality both over the cycle and over liquidity planning horizons. If market participants disclosed these procyclicality measures of their margin models, this could help counterparties to anticipate potential increases in margin requirements, and to prepare accordingly.
Initial margin requirements for a portfolio of derivatives are typically calculated using a risk model, such as one of the well-known family of value-at-risk models. Most common risk models are procyclical. Margin requirements for the same portfolio are higher in times of market stress and lower in calm conditions. This can be an undesirable property, as a rise in margin requirements during a period of market stress could cause market participants to face funding strains.
Regulation has recognised that, subject to being adequately risk sensitive, margin models should not be ‘overly’ procyclical, both for margin models for centrally cleared (CPSS-IOSCO 2012) and non-centrally cleared (BCBS-IOSCO 2013) derivatives. There is, however, no standard definition of procyclicality. Our recent work proposes quantitative measures of procyclicality, and studies various margin models with regard to both their risk sensitivity and procyclicality (Murphy, Vasios, and Vause 2014).
Based on this analysis, we recommend that central counterparties and major dealers should disclose the procyclicality properties of their margin models, for example, by reporting the measures proposed in this column. This would help derivatives users to anticipate potential margin calls and ensure they have adequate holdings of, or access to, sufficient liquid assets....MORE
