Unlike 2008, the solvency and liquidity of the banking system was not at the very forefront of market and regulator concerns. And, of course, the shock itself did not originate in the financial system but rather in a once-in100 year pandemic that has left us with many other, more powerful, and disturbing memories. But it is worth refreshing our memories about just how extraordinary were the events of late February and March 2020. The realisation that we were facing a global pandemic – and that, in order to contain it, large parts of the global economy would need to be shut down – sparked a reassessment of financial asset values and, as one would expect, a ‘flight to safety’ by investors. In February 2020, as you would expect, risky asset prices fell sharply. At the same time, the price of traditionally safe assets rose sharply and yields fell – the yield on US treasuries for example fell by around 100 bps. This flight to safety was also reflected in the gold price, which rose by around 4% over this initial period. In the early weeks of March however – from the 9th to the 18th – a different dynamic took hold; an accelerating ‘dash for cash’ in which, given the illiquidity of other markets, investors sold their most liquid assets, driving safe asset prices down. A dash for cash which turned into a stampede. The numbers are impressive.
By bringing together a new extensive set of quantitative data and survey responses from an array of global CCPs, clients and intermediaries, we were able to clarify the quantitative picture of the margin dynamics during the ‘dash for cash’. First, this revealed the scale of the shock on margin call. The total initial margin required by CCPs increased by over 70% (roughly $ billion) from the onset of the crisis to its peak in the ‘dash for cash’ period. Daily variation margin calls during the period of most acute stress in March 2020 were significantly higher than average flows observed between January and February 2020, increasing by over 500%, from around $ billion at the onset of the crisis to a peak of around $ billion. To put this into perspective US open-ended funds (OEFs), which represent around half of the global OEF market, saw a similar magnitude of outflows in March, at just under $ billion. Second, we identified significant dispersion in the size of initial margin increases across, and within, asset classes. The increases were most pronounced in exchange-traded derivatives (ETD) products and equity securities. Exchange-traded derivatives accounted for two-thirds of the total required across all asset classes, while initial margin collected by CCPs clearing cash equities increased by the most in relative terms (more than 300%). The differences we saw in margin dynamics across asset classes are partially explained by differences in the size of the shock experienced in each asset class.