Margin in Derivatives Trading
First published:
ISBN: 978-1-78272-390-5
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Procyclicality in Sensitivity-Based Margin Requirements
Paul Glasserman and Qi Wu
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
15.1 INTRODUCTION
Margin requirements for derivatives reduce counterparty credit risk, but procyclical requirements can strain funding liquidity in times of market stress by increasing sharply with increased volatility. The industry standard model for initial margin in the non-cleared market, the Standard Initial Margin Model (SIMM), includes features to reduce procyclicality. Using the example of an option on an interest rate swap, we show that the method is nevertheless subject to procyclicality through the dependence of price sensitivities on market conditions. The degree of procyclicality varies across contract types and market conditions. Anticipating potential margin spikes requires regular liquidity stress testing and would benefit from greater transparency in the updating of model parameters.
Margin requirements for over-the-counter (OTC) derivatives support financial stability by reducing counterparty credit risk: margin provides a buffer that protects one party to a contract from losses upon the default of the other party. But margin requirements can potentially amplify liquidity risk: if margin levels spike in times of market stress, then market participants need
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