TORONTO, Dec. 22 /CNW/ - Regulators aiming to ward off the next financial market failure need to implement rules to smooth the boom-bust cycle in margin requirements and haircuts used in securities financing and derivative transactions, which seriously exacerbated the last financial crisis, according to a study from the C.D. Howe Institute. In Warding Off Financial Market Failure: How to Avoid Squeezed Margins and Bad Haircuts, David Longworth, Adjunct Professor at Carleton University and Former Deputy Governor of the Bank of Canada, argues that key elements in a system-wide regulatory framework should include rules to mitigate swings between loose terms for margins and haircuts in boom times, and tightened terms during busts.
Under Professor Longworth's chairmanship, the Committee on the Global Financial System at the Bank for International Settlements published a report in March 2010. He discusses its recommendations to mitigate market failures that exacerbated the financial crisis, and argues that they should be adopted in their strongest form internationally, including by Canada.
Longworth emphasizes "through-the-cycle" haircuts and initial margins, the potential use of add-ons to haircuts and margins by macroprudential authorities, and market practices that are less procyclical than they were before and during the crisis.
For the study go to http://www.cdhowe.org/pdf/backgrounder_135.pdf
For further information: For further information:
David Longworth, Adjunct Professor, Carleton University; or
Philippe Bergevin, Policy Analyst,
C.D. Howe Institute. Phone: 416-865-1904