Margins serve as a critical mechanism for mitigating default risk in centrally cleared derivatives. Brokerage firms, acting as intermediaries, may impose supplemental margins on investors beyond those required by clearinghouses. A January 2025 policy report from global financial regulators recommended enhanced margin-calculation disclosures to improve predictability and reduce liquidity pressures. In a new article, I highlight the U.S. regulatory transparency gap concerning brokerage firm margin add-ons compared with both the report’s recommendations and the European initiatives. I further propose integrating ex-post reporting of these add-ons into the existing framework, enabling investors to assess broker-dealer consistency and compare costs, thereby promoting informed firm selection and fostering competitive markets beyond mere name recognition.
Central clearing for over-the-counter (OTC) derivatives in the United States became a pivotal regulatory focus following the 2008 financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act,[1] enacted in July 2010, mandated central clearing of standardized OTC derivatives to mitigate systemic risk and enhance transparency in the financial system. A central clearinghouse interposes itself between the original buyer and seller, becoming the counterparty to both sides of the transaction. In case of a clearing member’s default, the clearinghouse uses the defaulting member’s collateral and open positions to cover losses.
By the first half of 2024, approximately 73.5 percent of the total notional value of interest rate derivatives and 81.6 percent of credit derivatives in the U.S. were centrally cleared.[2] Globally, 76 percent of interest rate derivatives and 65 percent of credit derivatives were centrally cleared by the end of 2023.[3]
Central clearinghouses require clearing members and their clients to deposit collateral, called margins, to safeguard counterparty defaults. These margins are deposited initially when positions are opened and subsequently adjusted to reflect changes in the positions’ values throughout their lifecycle. This dynamic approach to risk management ensures that the clearinghouse maintains adequate protection against market fluctuations and potential defaults until the positions are closed.
Clearing members may impose additional margin requirements, often referred to as “add-ons,” on their clients. These add-ons are typically justified by client-specific risk factors that may not be fully captured by the standard margin models used by clearinghouses. Such factors could include a client’s creditworthiness, trading patterns, or portfolio composition.
On January 15, 2025, the Basel Committee on Banking Supervision, Committee on Payments and Market Infrastructures, and International Organization of Securities Commissions jointly published a report titled “Transparency and responsiveness of initial margin in centrally cleared markets – review and policy proposals” (the “BCBS-CPMI-IOSCO Final Report”).[4] This comprehensive document resulted from extensive industry consultation and feedback regarding margin practices and challenges in centrally cleared OTC derivatives.
One key concern raised in the BCBS-CPMI-IOSCO Final Report is the opaque nature of clearing member margin add-on assessments, which can lead to unexpected margin obligations and liquidity challenges for investors. To mitigate this, the report recommends that clearing members provide clearer explanations of margin methodologies and inform clients of calibration changes. However, these recommendations remain voluntary in the U.S.
In response to the call for increased margin add-on transparency, my article proposes changes to the current U.S. regulatory framework. The proposal seeks to balance the imperative of investor transparency with the need to protect clearing members’ proprietary information and flexibility in margin assessments.
The Margin System for Centrally Cleared Financial Derivatives
Clearing Member Margins
Clearinghouses routinely charge two margins: initial margin and variation margin. The initial margin is collateral collected upfront when a derivative position is opened. It acts as a buffer against potential losses that the clearinghouse may incur from the clearing member’s default over a specified period.[5] Initial margin is calculated using risk models approved by regulators, such as SPAN (Standard Portfolio Analysis of Risk) or VaR (Value at Risk).[6] These models consider factors like market volatility, liquidity, and the potential for adverse price movements. The initial margin is held by the clearinghouse and is not returned until the position is closed or expires.
Variation margin is based on the daily mark-to-market value of a position. If the position loses value, the party must post additional collateral; if it gains value, it receives collateral from the clearinghouse. Variation margin is typically adjusted daily, but in volatile markets, the clearinghouse may call for intraday margins.[7]
Clearinghouses regularly conduct stress tests to ensure that margin levels are sufficient to cover extreme but plausible market scenarios. They also monitor the financial health of clearing members and may require additional collateral if a member’s risk profile changes.[8]
Margins for Clearing Member’s Clients
Clearinghouses establish the minimum initial and variation margin levels for both clearing members and their client accounts. Clearing members are responsible for collecting these margins from clients and ensuring adherence to the clearinghouse requirements.
For clearinghouses to calculate the initial margin, clearing members must report each client’s trade individually rather than aggregating positions. This means margin requirements are calculated per client, preventing the netting of excess margin from one client against another’s deficit.[9] This practice mitigates “fellow-customer risk” in the event of a default. By U.S. regulation, clearing members must hold client margins in segregated accounts to prevent them from being used to cover losses of other clients or the clearing member itself. [10]
Clearing members may impose additional margins, or “margin add-ons,” on clients to account for intermediary risk. These add-ons reflect client creditworthiness, position liquidity, and potential delays in margin posting. The add-on amount is determined by the clearing member’s internal risk models and policies.[11]
In the event of a client’s failure to meet margin obligations, whether initial or variation, the clearing member may liquidate the client’s positions or utilize the posted margin to cover losses. If the client’s losses exceed his or her margin, the clearing member must cover the remaining amount.[12] That is why they charge additional margin buffers.
Clearing members charge clients fees for their services, which may include clearing fees passed through from the clearinghouse, margin financing fees (if the client borrows funds to meet margin requirements), and administrative fees for managing collateral and margin accounts.[13]
Transparency Concerns About Client Margin Add-Ons
The BCBS-CPMI-IOSCO Final Report highlights a significant lack of transparency surrounding clearing members’ communication of margin add-ons to clients. While some clearing members provide limited, retrospective information on the discrepancies between clearinghouse margins and their own add-ons, this practice is neither standardized nor widespread.[14] This opacity hinders clients’ ability to understand and anticipate their total margin obligations, potentially leaving them vulnerable to sudden liquidity demands. It also creates a breeding ground for disputes between clients and clearing members.
Clearing members typically include provisions in client agreements that grant them discretionary authority to impose additional margin requirements. However, the specific procedures and models used to calculate these add-ons are rarely disclosed in detail. For instance, Goldman Sachs Group, Inc., a major clearing member, states in its margin agreements that, due to the idiosyncratic nature of client margins, it does not provide a margin simulation tool like that available to clearing members from clearinghouses. The agreement suggests clients contact relationship personnel for further information on margin requirements under various scenarios. The specific information provided and its utility in assessing future add-on margins remain unclear.[15] Morgan Stanley & Co. LLC, another leading clearing member, operates with similar levels of disclosure.[16]
Although clearing members often pass through clearinghouse margins to clients without add-ons,[17] they are more likely to implement add-ons during periods of market volatility or distress when clients most urgently need transparency to manage their liquidity.[18] Furthermore, the opacity surrounding add-on calculations can create an uneven playing field, potentially subjecting some clients to higher add-ons without clear justification, leading to potential unfair treatment.
In response to the identified transparency issues surrounding client margins, the BCBS-CPMI-IOSCO Final Report proposes the following enhancements in global financial markets:[19]
- Provide clients with comprehensive documentation detailing margin calculation methodologies, including access to margin simulation tools where applicable.
- Disclose the rationale and magnitude of any deviations from standard margin calculations to affected clients.
- Establish an internal governance framework to determine when to charge margin add-ons.
- Develop an analytical framework to assess the impact of margin deviations on client accounts.
- Notify clients of any modifications to client margin calibrations, clearly explaining the triggers and thresholds used in these adjustments.
- Provide clients with timely notification of changes to margin methodologies, while maintaining the flexibility to adjust margins during periods of market stress.
These recommendations aim to enhance transparency and improve the predictability of margin add-ons. Currently, most of them have not been incorporated into U.S. regulations and hence are nonbinding for U.S. clearing members.
U.S. Regulatory Landscape for Client Margin Add-Ons
U.S. regulations do not mandate that clearing members disclose their client margin add-on calculation methodologies. While the Commodity Futures Trading Commission (CFTC) requires clearinghouses to have access to clearing members’ risk-management policies and practices, this requirement does not mandate disclosure of clearing members’ add-on margin calculations. [20] CFTC Regulation 1.73 requires brokerage firms to provide clients with daily reports on margin requirements, collateral, and account balances, [21] but these snapshots do not reveal the underlying calculation processes.
FINRA Rule 2264 (Margin Disclosure Statement) requires brokerage firms to provide clients with a comprehensive document before opening a margin account. This document should outline the risks of margin trading, the firm’s right to liquidate assets without notice, the ability to increase “house” maintenance margin requirements, and the lack of entitlement to margin call extensions. Firms must also publicly post this disclosure and provide it annually to clients. Additionally, FINRA Rule 4210 mandates general disclosures about margin account risks and terms. [22] However, these disclosures do not detail specific add-on calculation methods. Although FINRA requires firms to establish procedures for formulating their own margin requirements and reviewing the need for higher margins than mandatory levels, clearing members are not required to disclose their procedures to clients.[23]
By contrast, the European Union has introduced new disclosure requirements as part of the European Market Infrastructure Regulation (EMIR) 3.0 amendments.[24] Effective December 24, 2024, EMIR 3.0 mandates enhanced transparency by requiring clearing members and clearinghouses to disclose (1) how a clearinghouse margin model operates, (2) situations and conditions that trigger margin calls, (3) procedures used to determine client margin amounts, and (4) margin simulations under various scenarios. This information must be provided upon establishing the client-clearing relationship and at least quarterly thereafter. The European Securities and Markets Authority (ESMA) is tasked with developing compliance standards by December 24, 2025.[25]
A Proposals to U.S. Regulators for Increased Transparency
U.S. regulations can improve client margin transparency for centrally cleared derivatives by making two changes.
First, codify the BCBS-CPMI-IOSCO Final Report’s recommendations. The SEC, CFTC, and FINRA should incorporate the BCBS-CPMI-IOSCO Final Report’s recommendations into their rules, similar to the approach taken in the EU. This would mandate clearing members to disclose functional details of client margin calculations upon establishing a clearing relationship. To maintain flexibility during extreme market conditions, the pre-disclosure regulation should allow for adjustments to the disclosed mechanisms, reflecting the “as appropriate” intent of the BCBS-CPMI-IOSCO Final Report.
Second, implement an ex-post reporting system. U.S. regulators such as FINRA should establish an ex-postreporting system in instances of client margin add-ons. The report should include:
- Incidences of add-ons by cleared products,
- The number and percentage of accounts subject to add-ons, by cleared products,
- Multipliers (highest, lowest, mean, median) applied to clearinghouse margins and the dollar amounts of add-ons,
- Factors considered in add-on calculations, demonstrating their impact beyond a mere list. To protect reporting firms’ proprietary information, this data may be shielded from public disclosure, as necessary, and
- Client responses to the add-ons, including their challenges.
Reports would be submitted in a standardized format, such as XML, to facilitate automated processing and analysis by FINRA and, where appropriate, the investing public.
The proposed ex-post reporting can be integrated into FINRA’s existing margin-related reporting obligations to minimize compliance costs. Currently, FINRA Rule 4521(d) requires member firms that carry customer margin accounts to submit monthly reports, based on settlement dates, detailing the total debit balances in securities margin accounts. These reports are due by the last business day of each month, unless FINRA grants an alternative schedule.[26] FINRA gathers this data through the Customer Margin Balance Form, which is then aggregated and made publicly available.[27] Additionally, FINRA Rule 4220 requires brokerage firms to maintain a daily record of required margins.[28]
The proposed ex-post reporting offers several advantages.
First, it establishes a framework for accountability, encouraging consistent margin impositions and addressing concerns about disparate treatment of clients in similar situations. This disclosure empowers investors to assess whether they were charged disproportionately high add-ons compared with others, providing them with evidence when challenging or negotiating their margin requirements. Simultaneously, it protects clearing members’ intellectual property by requiring only regulatory but not public disclosures of sensitive proprietary information.
Second, it empowers investors to more accurately anticipate scenarios that trigger add-ons and estimate their potential magnitude based on the information provided in the reports. In the absence of enhanced transparency, investors may encounter unforeseen margin obligations, which could precipitate liquidity pressures. This improved clarity enables investors to manage their risk exposure more effectively and plan for potential margin requirements.
Third, it allows investors to compare margin add-ons among clearing members, facilitating informed decisions when selecting firms for clearing services. This fosters healthy and responsible competition in the clearing services industry, moving beyond entrenchment based solely on name recognition. It encourages clearing members to optimize their risk management practices and pricing strategies to attract and retain clients.
Conclusion
Effective margin management is essential for mitigating default risks in centrally cleared financial derivatives. However, a regulatory deficiency exists regarding client margin transparency. This lack of transparency impairs investors’ ability to anticipate margin obligations and exacerbates liquidity risks during market distress. While the BCBS-CPMI-IOSCO Final Report recommends enhanced disclosures, U.S. regulations have yet to incorporate them, creating a regulatory disparity with the EU.
Consequently, my article urges U.S. regulatory authorities to adopt rules incorporating the BCBS-CPMI-IOSCO recommended disclosures. Additionally, it proposes ex-post reporting of add-on margin impositions, providing regulators and the public, where appropriate, justifications for and magnitudes of the add-ons. This reporting can be integrated into the existing reporting framework to minimize compliance costs. It strikes a balance between enhanced transparency and the protection of proprietary margin methodologies, while simultaneously allowing clearing members to maintain the necessary flexibility to adapt margins commensurate with client risk exposures.
ENDNOTES
[1] Pub. L. No. 111-203, § 929-Z, 124 Stat. 1376, 1871 (2010) (codified at 15 U.S.C. § 78o)
[2] International Swaps and Derivatives Association, Key Trends in the Size and Composition of OTC Derivatives Markets in the First Half of 2024 (Dec. 2024), https://www.isda.org/a/GpbgE/Key-Trends-in-the-Size-and-Composition-of-OTC-Derivatives-Markets-in-the-First-Half-of-2024.pdf.
[3] Bank for International Settlements, OTC Derivatives Statistics at End-December 2023 (May 2024), https://www.bis.org/publ/otc_hy2405.htm.
[4] Basel Committee on Banking Supervision, Committee on Payments and Market Infrastructures & International Organization of Securities Commissions, Transparency and Responsiveness of Initial Margin in Centrally Cleared Markets – Review and Policy Proposals (Jan. 15, 2025), https://www.bis.org/bcbs/publ/d590.htm.
[5] Id. at 6.
[6] CME Grp., Futures and Options Margin Model, https://www.cmegroup.com/solutions/risk-management/performance-bonds-margins/futures-and-options-margin-model.html, at 7 (“CME Clearing uses a variety of Value-at-Risk (VaR)-based models to determine our benchmark margin levels, which are then incorporated into SPAN”).
[7] The BCBS-CPMI-IOSCO Final Report, supra note 4, at 5.
[8] Commodity Futures Trading Commission, Supervisory Stress Test of Clearinghouses, at 19 (Nov. 2016), https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/cftcstresstest111516.pdf.
[9] CME Grp., Customer Margining at CME Clearing, https://www.cmegroup.com/education/articles-and-reports/customer-margining-at-cme-clearing.html.
[10] Commodity Exchange Act § 4d(a)(2), 7 U.S.C. § 6d(a)(2) (2018); 17 C.F.R. § 1.20 (2023).
[11] The BCBS-CPMI-IOSCO Final Report, supra note 4, at 16.
[12] CME Clearing, CME Clearing’s Financial Safeguards System, at 4, https://www.dormantrading.com/pdf/financialsafeguards.pdf (“Each clearing member assumes performance and financial responsibility for all transactions it clears, including transactions cleared on behalf of its customers and on behalf of the clearing member and its affiliates”).
[13] Goldman Sachs & Co. LLC, Service Provider Disclosure for Goldman Sachs & Co. LLC Relating to Institutional Brokerage Services, at 3-4, https://www.goldmansachs.com/disclaimer/gsco-erisa-fee-disclosure.pdf.
[14] The BCBS-CPMI-IOSCO Final Report, supra note 4, at 3-4.
[15] Goldman Sachs & Co. LLC, EMIR Article 38(8) Disclosure Statement, at 6, https://www.goldmansachs.com/disclosures/pdfs/gs-EMIR-Clearing-Services-Provider-Margin-Transparency-Statement.pdf.
[16] Morgan Stanley, EMIR Article 38(8) CCP Margin Calculation Disclosure, at 5-6, https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/sales_and_trading_disclosures/Article_38_8_CCP_Margin_Calculation.pdf.
[17] International Swaps and Derivatives Association, ISDA/IIF Response to the BCBS-CPMI-IOSCO Consultative Report “Transparency and Responsiveness of Initial Margin in Centrally Cleared Markets – Review and Policy Proposals”, at 1 (Executive Summary), https://www.isda.org/a/qbwgE/ISDA-Response-to-Margin-Transparency.pdf.
[18] The BCBS-CPMI-IOSCO Final Report, supra note 4, at 30.
[19] The BCBS-CPMI-IOSCO Final Report, supra note 4, at 30 – 31.
[20] 17 C.F.R. § 39.13 (h)(5)(i)(b) (2025).
[21] 17 C.F.R. § 1.73 (2025).
[22] FINRA Rule 4210, Margin Requirements, https://www.finra.org/rules-guidance/rulebooks/finra-rules/4210.
[23] FINRA Rule 4210(d).
[24] Regulation (EU) 2024/2987 of the European Parliament and of the Council of 27 November 2024 amending Regulation (EU) No 648/2012.
[25] Clifford Chance, EMIR 3.0 – New Rules for Trading and Clearing Derivatives in the EU (Dec. 2024), at 2, https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2024/12/emir-3-0-new-rules-for-trading-and-clearing-derivatives-in-the-eu.pdf.
[26] FINRA Rule 4521(d)(1).
[27] FINRA, Margin Statistics, https://www.finra.org/rules-guidance/key-topics/margin-accounts/margin-statistics.
[28] FINRA Rule 4220.
This post comes to us from Professor Lynn Bai at the University of Cincinnati College of Law.