A similar dynamic played out when the Ukraine invasion sent energy prices soaring. The European Federation of Energy Traders said in early March that the initial margin one large energy producer had to post with CCPs rose to 6 billion euros, from 1 billion euros last summer, even though its underlying position was unchanged. The same energy trader also faced daily variation margin payments of 500 million euros, compared with 50 million euros previously.
Meanwhile, surging energy and commodity prices this year forced energy traders who were short the market to post more collateral and take long positions to cover their losses. That drove prices higher, forcing yet more margin calls. The most extreme example was nickel trading on the London Metal Exchange which pushed broker-dealers to the brink of failure and forced the LME to cancel some trades.The question is how to prevent a repeat.
The least-bad solution is for CCPs to demand more collateral requirements during normal times, reducing the need for big increases. The Futures Industry Association, whose members include banks and brokers, in late 2020There are downsides. Higher margin makes using derivatives more expensive, potentially benefitting big traders relative to smaller ones. It also doesn’t necessarily prevent CCPs from asking for more cash in times of stress.
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