Rethinking Margin Period of Risk

35 Pages Posted: 22 Jan 2016

See all articles by Leif B. G. Andersen

Leif B. G. Andersen

Bank of America Merrill Lynch

Michael Pykhtin

Board of Governors of the Federal Reserve System

Alexander Sokol

CompatibL

Date Written: January 21, 2016

Abstract

We describe a new framework for collateralized exposure modelling under an ISDA Master Agreement with a Credit Support Annex. The proposed model captures legal and operational aspects of default in considerably greater detail than models currently used by most practitioners, while remaining fully tractable and computationally feasible. Specifically, it considers the remedies and suspension rights available within these legal agreements; the firm's policies in availing itself of these rights; and the typical time it takes to exercise them in practice. The inclusion of these effects is shown to produce significantly higher credit exposure for representative portfolios compared to the currently used models. The increase is especially pronounced when dynamic initial margin is also present.

Keywords: Margin Period of Risk, Swaps, Collateral, Credit Exposure, CVA

JEL Classification: G10, G13, G20, G33, C15

Suggested Citation

Andersen, Leif B.G. and Pykhtin, Michael and Sokol, Alexander, Rethinking Margin Period of Risk (January 21, 2016). Available at SSRN: https://ssrn.com/abstract=2719964 or http://dx.doi.org/10.2139/ssrn.2719964

Leif B.G. Andersen (Contact Author)

Bank of America Merrill Lynch ( email )

One Bryant Park
New York, NY 10036
United States
646-855-1835 (Phone)

Michael Pykhtin

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/michael-v-pykhtin.htm

Alexander Sokol

CompatibL ( email )

100 Overlook Center
Second Floor
Princeton, NJ 08540
United States

HOME PAGE: http://www.compatibl.com

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