What Is ‘Procyclicality’ in Margin Setting for Volatile Assets?
Procyclicality is the tendency for margin requirements to increase when volatility rises and asset prices fall, forcing market participants to post more collateral precisely when their financial resources are strained. This can amplify market downturns by forcing deleveraging and asset sales, further driving down prices.
Glossar
Procyclicality
Dynamic ⎊ The procyclical dynamic is driven by risk models that rely heavily on recent historical volatility data to set margin levels.
Margin Setting
Collateral ⎊ Margin setting within cryptocurrency derivatives fundamentally dictates the capital required to initiate and maintain a leveraged position, functioning as a risk mitigation tool for exchanges and counterparties.