I think it's fair to say that [the Brexit vote] was one of the factors that factored into today's decisions. Clearly, this is a very important decision for the United Kingdom and for Europe.  It is a decision that could have consequences for economic and financial conditions in global financial markets. If it does so, it could have consequences, in turn, for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy.

One policy response that the Federal Reserve has advocated and that has now been proposed by the Financial Stability Board (FSB), is for minimum margins to be required for certain forms of securities financing transactions (SFTs) that involve extensions of credit to parties that are not prudentially regulated financial institutions.6 This system of margins is intended to serve the macroprudential aim of moderating the build-up of leverage in the use of these securities in less regulated parts of the financial system and to mitigate the risk of procyclical margin calls by preventing their decline to unsustainable levels during credit booms.

Given the ease with which such transactions may move across borders, it is particularly important that the FSB has proposed a framework that could be applicable in all major financial markets. We will welcome comments on this proposal when, as I expect, the Federal Reserve issues a notice of proposed rulemaking to implement it domestically, probably by using the Federal Reserve's authority under the Securities Exchange Act of 1934 to supplement our prudential regulatory authorities. But it is also important to continue analysis of other macroprudential policy options that would address the risks associated with short-term wholesale funding. Indeed, even the FSB proposal does not extend to SFTs backed by government collateral, a very important source of short-term wholesale funds.

The framework requires both financial firms and systemically important nonfinancial firms that trade derivatives to collect both variation margin and initial margin, as is the case for centrally cleared derivatives. The initial margin requirements represent a significant change to existing market practice and will undoubtedly impose some costs on market participants. As originally proposed, the new framework would have required most market participants to collect initial margin from the first dollar of exposure. The International Swap Dealers Association estimated that roughly an additional $1.7 trillion in initial margin would have been required globally.12 In light of this concern, the framework was released for public consultation on two separate occasions and the Basel Committee and IOSCO conducted a detailed impact study to determine the potential liquidity costs of the new requirement.

The final version of the framework addressed these concerns by allowing firms to begin collecting initial margin only as potential future credit exposures rise above $65 million for a particular counterparty. According to the impact study, this revision reduced the estimated global liquidity requirement from roughly $2.3 trillion to $900 billion.14 The result is a margin regime that will protect the financial system from the largest and most systemic exposures while also reducing overall liquidity costs and providing relief to smaller derivatives market participants.

Margin requirements serve two purposes. They can affect the cost of credit, but they also are a very important part of the counterparty risk management process for exchanges. And so we need to be careful in changing margin requirements that we don't interfere with these other important functions, or that we don't unnecessarily reduce the liquidity in those markets.

Margin requirements serve two purposes. They can affect the cost of credit, but they also are a very important part of the counterparty risk management process for exchanges. And so we need to be careful in changing margin requirements that we don't interfere with these other important functions, or that we don't unnecessarily reduce the liquidity in those markets.

From the Q&A session

With respect to regulatory options or "regulatory substitutes" to address asset price bubbles, some observers have suggested increasing margin requirements to counter perceived speculation in equities markets.  Even if one presumes that a bubble in this market can be identified before it bursts, however, such an approach is unlikely to succeed.  Only a small fraction of equity is purchased using credit.  Moreover, money is fungible, so that if an attempt were made to limit the amount of credit that could be used for a particular purpose...it is highly likely that some investors who would be constrained by such a regulation would find ways to channel credit from other sources to effect the desired purchases.

Some have asserted that the Federal Reserve can deflate a stock-price bubble--rather painlessly--by boosting margin requirements. The evidence suggests otherwise. First, the amount of margin debt is small, having never amounted to more than about 1-3/4 percent of the market value of equities; moreover, even this figure overstates the amount of margin debt used to purchase stock, as such debt also finances short sales of equity and transactions in non-equity securities. Second, investors need not rely on margin debt to take a leveraged position in equities. They can borrow from other sources to buy stock. Or, they can purchase options, which will affect stock prices given the linkages across markets.

Thus, not surprisingly, the preponderance of research suggests that changes in margins are not an effective tool for reducing stock market volatility. It is possible that margin requirements inhibit very small investors whose access to other forms of credit is limited. If so, the only effect of increasing margin requirements is to price out of the market the very small investor without addressing the broader issue of stock price bubbles.

If a change in margin requirements were taken by investors as a signal that the central bank would soon tighten monetary policy enough to burst a bubble, then there might be the appearance of a causal effect. But it is the prospect of monetary policy action, not the margin increase, that should be viewed as the trigger. In a similar manner, history tells us that "jawboning" asset markets will be ineffective unless backed by action.

Some argue that bubbles can be prevented or defused by financial regulatory initiatives. It is observed that asset bubbles have often been associated with rapid credit expansion, and hence it is claimed that restraining credit growth could quash nascent bubbles. A bubble could conceivably be defused by restrictive credit regulations that stifle economic growth. It is by no means clear, however, that such a regime would be more conducive to wealth creation over time than our current regulatory system. Also of relevance, in a vibrant financial system, such as exists in the United States, there will always be many avenues available to investors for financing a bubble. Furthermore, many analysts maintain that stocks are priced at the margin by institutions with little or no financing needs.