Margin in Derivatives Trading
First published:
ISBN: 978-1-78272-390-5
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Efficient Initial Margin Optimisation
Nishchal Devanur and Andrea Vidozzi
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
14.1 INTRODUCTION
The introduction of the uncleared margin requirements (UMR) spurred a flurry of activity aimed at reducing and managing the initial margin (IM) requirements associated with over-the-counter (OTC) trading. In this chapter we provide an overview of the mainstream margin reduction strategies, with a particular emphasis on the case where the IM is calculated using the International Swaps and Derivatives Association (ISDA) Standard Initial Margin Model (SIMM).
The wave of changes in the regulatory landscape after the 2007–9 global financial crisis has brought fundamental changes to the OTC markets. For instance, the new UMR have introduced entirely new requirements on collateral arrangements, mandating the use of IM and variation margin (VM) for many financial entities (see Part II of this volume). This, combined with the increasing cost of trading through central counterparty clearing houses (CCPs),11As more and more trades get cleared, institutions start hitting risk and/or notional limits that trigger additional charges, such as liquidity, that may drastically increase the IM requirements. has been a catalyst for a foundational change in the way firms view
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