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Minimum Margin Proposal Will Harm Liquidity, Increase Volatility

SEC should not endorse a margin calculation that could harm liquidity, increase volatility, and result in higher costs for consumers.



WASHINGTON – The American Securities Association (ASA) today sent a letter to the Securities and Exchange Commission (SEC) opposing a proposal from the Fixed Income Clearing Corporation (FICC) to replace the VaR floor model with a minimum margin amount (MMA).

“Last year’s steep market decline in response to the emergence of the COVID-19 pandemic does not warrant the SEC endorsing a margin calculation that could harm liquidity, increase volatility, and result in higher costs for consumers,” said ASA CEO Chris Iacovella.

“We are not asking FICC to reveal the inner workings of its VaR formula, but we are suggesting that if market participants understand the levels of volatility that will cause a margin increase and the amount of these increases as volatility rises, then sudden spikes in volatility may not trigger forced selling or other unnecessary market disruptions by market participants who need to meet their margin obligations,” Iacovella wrote in the letter.

“This kind of transparency would allow markets to function more efficiently as participants would understand what will be expected of them during market stress. Forced selling due to unexpected increases in margin is extremely disruptive to the market and a reasonable means to avoid this dynamic should be considered as FICC and the SEC undertake reform.”



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