From the Document: "The Covid-19 [coronavirus disease 2019] pandemic led to market turmoil in mid-March. Large price movements prompted large margin calls from central counterparties (CCPs). This strained the liquidity positions of large dealer banks. Banks also hoarded liquid assets, possibly in anticipation of large margin calls. This exacerbated the liquidity squeeze. Nevertheless, CCPs remained resilient, vindicating the post-crisis reforms that incentivised central clearing. The procyclicality of leverage embedded in margining models might have played a role in the events of mid-March. These margin models are critical because they underpin the management of counterparty credit risk. Margin models of some CCPs seem to have underestimated market volatility, in part because they have relied on a short period of historical price movements from tranquil times. These CCPs had to catch up and increase margins at the wrong time, squeezing liquidity when it was most needed. Going forward, the interaction of CCPs with clearing member banks is critical ('CCP-bank nexus'). Importantly, actions that might seem prudent from an individual institution's perspective, such as increasing margins in a turmoil, might destabilise the nexus overall. Therefore, central banks need to assess banks and CCPs jointly rather than in isolation."
BIS Bulletin No. 13; Bank for International Settlements Bulletin No. 13
2020 Bank for International Settlements
Bank for International Settlements: https://www.bis.org/