Explain the Concept of ‘Procyclicality’ in Margin Requirements

Procyclicality in margin requirements refers to the tendency for margin requirements to increase during times of market stress (when volatility is high and prices are falling) and decrease during stable, rising markets. This creates a negative feedback loop: rising margins force liquidation, which further pushes prices down and increases volatility, leading to even higher margin calls.

Regulators aim to mitigate this effect to prevent systemic instability.