Prompt and transparent margining and, where possible, central counterparty (CCP) clearing helps avoid the situation in which the perceived stress on one major participant can cause a panic which amplifies stress across the market due to uncertainty about who else, is exposed – and whether those exposures are adequately protected by sufficient margin.1 As a result of those reforms, the financial system entered the Covid crisis in a much stronger position with regard to collateral and counterparty credit risk, with, for example, at least $ in additional collateral against over the counter (OTC) derivative exposures.2 Very significant and sudden changes in asset prices did not lead to counterparty credit risk – actual or anticipated. Margin call is of course pro-cyclical, insofar as it reflects movements in markets. This is not a bug in the system, it is a feature. As markets move, losers have to pay variation margin to winners. And as risks grow, initial margin rises to protect the members of a clearing house from the consequences of a future default by other members. This characteristic of margin is unavoidable if we are to ensure that collateralisation keeps pace with risks and counterparty credit risk is minimised. But it is right to try to dampen this dynamic to the extent practicable and to avoid unwarranted procyclicality. Against that background, let me set out the findings of the FSB group on margin and the proposed next steps.
For example, an unfavourable scenario in which a burst asset bubble leads to a deflationary situation that is hard to overcome will be assigned greater importance than a high-inflation scenario. Experience from Japan in the 1990s illustrates this. Assessments of this type must be taken into account in the monetary policy decision. The moral of the story is that monetary policy cannot be reduced to a mechanical reading exercise. However well-prepared the material on which monetary policy decisions are based, there will always be complex and important aspects that policymakers must take a stance on. It is important that these aspects are discussed from several different perspectives. This is one reason why we have an Executive Board made up of economists with different backgrounds and expertise. It is beneficial and important for us to conduct a wide-ranging debate on monetary policy at the Riksbank and not just externally. I believe that it leads to better monetary policy decisions. 10  BIS central bankers’ speeches