Question
What is the relevant definition of margin call dispute for the purpose of doubling the margin period of risk, under Article 285(4), for netting sets which have experienced a material number of extended disputes?
Background on the question
According to Article 285(4) “If an institution has been involved in more than two margin call disputes on a particular netting set over the immediately preceding two quarters that have lasted longer than the applicable margin period of risk under paragraphs 2 and 3, the institution shall use a margin period of risk that is at least double the period specified in paragraphs 2 and 3 for that netting set for the subsequent two quarters”. The underlying rationale of this requirement is to prevent the reporting banks, when carrying out the calculation of the expected future exposure, from limiting collateralized exposures to the extent exceeding the credit support amount. This approach is too simplistic because it ignores that the collateral is not delivered immediately after the margin call is made. Indeed, margin calls can be disputed, and it may take several days for the reporting bank to realize that the counterparty is defaulting rather than disputing the call. At the same time, margin disputes may occur for several reasons but only some give rise to actual economic risk. In particular, from a counterparty credit risk management perspective only those margin disputes resulting in a failure to deliver the required amount of collateral by the counterparty are actually increasing the exposures. Margin calls disputed by the reporting banks are instead not cause for concern and therefore irrelevant for counterparty credit risk quantification.
Answer
Article 285(4) of Regulation (EU) No 575/2013 (CRR) states that "If an institution has been involved in more than two margin call disputes on a particular netting set over the immediately preceding two quarters that have lasted longer than the applicable margin period of risk under paragraphs 2 and 3, the institution shall use a margin period of risk that is at least double the period specified in paragraphs 2 and 3 for that netting set for the subsequent two quarters." For the purposes of Article 285(4), a margin call dispute should be interpreted to mean any margin call dispute, including where institutions are disputing the margin call of their counterparty.