A Sound Modelling and Backtesting Framework for Forecasting Initial Margin Requirements

Abstract

The introduction by regulators of mandatory margining for bilateral OTCs is going to have a major impact on the derivatives market, particularly in light of the additional funding costs and liquidity requirements that large financial institutions will face. Fabrizio Anfuso, Daniel Aziz, Paul Giltinan and Klearchos Loukopoulos propose in the following a simple and consistent framework, equally applicable to non-cleared and cleared portfolios, to develop and backtest forecasting models for Initial Margin.

Keywords: Initial Margin, BCBS-IOSCO, CCP, OTC, Clearing, Counterparty Credit Risk, XVA, Liquidity, Funding costs

JEL Classification: C12, C13, C15, C52, C53