This process involves modeling potential price movements with an appropriate confidence threshold, determining the closeout period in the event the participant defaults, and numerous other factors. Given the complexity of this modeling, it is important that CCPs rigorously back-test and stress-test the adequacy of their margin models under a wide range of extreme yet plausible scenarios.
More broadly, a CCP should test the sufficiency of its total financial resources – initial margin, default funds and capital – to cover potential credit losses, taking into account evolving market volatility and liquidity conditions. An important lesson from the financial crisis is that liquidity is extremely important in ensuring on-going viability and resilience during a period of financial stress.