Rethinking the Margin Period of Risk

45 Pages Posted: 23 Jan 2017

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 20, 2017

Abstract

We describe a new framework for modeling collateralized exposure under an International Swaps and Derivatives Association Master Agreement with a Credit Support Annex. The proposed model captures the legal and operational aspects of default in considerably greater detail than the 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 than do the current models. The increase is especially pronounced when the dynamic initial margin is also present.

Keywords: collateralized positions; initial margin; collateralized exposure; bilateral trading relationships.

Suggested Citation

Andersen, Leif B.G. and Pykhtin, Michael and Sokol, Alexander, Rethinking the Margin Period of Risk (January 20, 2017). Journal of Credit Risk, Vol. 13, No. 1, 2017. Available at SSRN: https://ssrn.com/abstract=2902737

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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