Margin in Derivatives Trading
First published:
ISBN: 978-1-78272-390-5
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Modelling Forward Initial Margin Requirements for Bilateral Trading
Justin Chan, Shengyao Zhu and Boris Tourtzevitch
Introduction
Variation and Initial Margin in the ISDA Credit Support Annex
Variation and Initial Margin Required by Central Counterparty Clearing Houses
Margin Requirements for Over-the-Counter Derivatives: A Supervisory Perspective
The Emergence and Concepts of the SIMM Methodology
The ISDA Standard Initial Margin Model Backtesting Framework
The Impact of Margin on Regulatory Capital
XVA for Margined Trading Positions
Modelling Forward Initial Margin Requirements for Bilateral Trading
Forward Valuation of Initial Margin in Exposure and Funding Calculations
Margin Value Adjustment for CCPs with Q-Simulated Initial Margin
Bilateral Exposure in the Presence of Margin
Central Counterparty Risk
Robust Computation of XVA Metrics for Central Counterparty Clearing Houses
Efficient Initial Margin Optimisation
Procyclicality in Sensitivity-Based Margin Requirements
Systemic Risks in Central Counterparty Clearing House Networks
8.1 INTRODUCTION
Since the introduction of bilateral initial margin (IM) by Basel Committee on Banking Supervision and International Organization of Securities Commissions (BCBS–IOSCO), there has been great interest within the industry in developing a model that can dynamically forecast initial margin for future time horizons (Anfuso et al 2016; Andersen et al 2017; Caspers et al 2017). As the introduction of the additional margin requirement is essentially a mechanism to exchange counterparty credit risk with both the short-term collateral liquidity risk and the long-term collateral funding cost, an appropriate initial margin simulation model is essential for the sound management of credit risk management and capital calculation, as well as funding and liquidity risk management. In this chapter, we provide several practical approaches to simulating initial margin, as well as possible validation and backtesting methods and comparison results, with a particular focus on computing counterparty credit risk and regulatory capital.
The chapter is organised as follows: Section 8.2 discusses the challenges to forward simulating bilateral initial margin. Section 8.3 provides the
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