Forecasting Initial Margin Requirements - A Model Evaluation

36 Pages Posted: 6 Feb 2017  

Peter Caspers

Quaternion Risk Management

Paul Giltinan

Quaternion Risk Management

Roland Lichters

Quaternion Risk Management

Nikolai Nowaczyk

Quaternion Risk Management

Date Written: February 3, 2017

Abstract

The introduction of mandatory margining for non-cleared portfolios has major implications for the pricing and risk measurement of OTC derivatives. In particular, a model for estimating future initial margin requirements is necessary to enable the calculation of pricing adjustments (MVA), net counterparty credit exposures and credit capital (RWA). Existing literature on the topic suggests a model which makes use of regression techniques, but little detail is available on the predictive quality of these models within a Monte Carlo simulation framework. We review these regression-based initial margin models in detail and compare their output against the actual margin requirements measured by the ISDA SIMM methodology. We observe that the models generally perform well for single trades but show some degradation for single option products and larger diversified portfolios. We investigate potential extensions and improvements to the model, along with examining some additional “conservatism” features that may have application in the context of credit exposure measurement. The Initial Margin modelling approaches discussed here are similarly applicable to centrally cleared or exchange-traded portfolios.

Keywords: Initial Margin, BCBS-IOSCO, SIMM, MVA, XVA, CCP

Suggested Citation

Caspers, Peter and Giltinan, Paul and Lichters, Roland and Nowaczyk, Nikolai, Forecasting Initial Margin Requirements - A Model Evaluation (February 3, 2017). Available at SSRN: https://ssrn.com/abstract=2911167 or http://dx.doi.org/10.2139/ssrn.2911167

Peter Caspers

Quaternion Risk Management ( email )

54 Fitzwilliam Square North
Dublin, D02X308
Ireland

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

Paul Giltinan

Quaternion Risk Management ( email )

54 Fitzwilliam Square North
Dublin, D02X308
Ireland

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

Roland Lichters (Contact Author)

Quaternion Risk Management ( email )

54 Fitzwilliam Square North
Dublin, D02X308
Ireland

Nikolai Nowaczyk

Quaternion Risk Management ( email )

54 Fitzwilliam Square North
Dublin, D02X308
Ireland

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