Variation Margin in Presence of Trade Cash Flows
Market infrastructure developments analysis, muRisQ Advisory
14 Pages Posted: 18 Apr 2018 Last revised: 7 Aug 2018
Date Written: April 1, 2018
With the generalisation of Variation Margin (VM) collateral, the derivative world is not driven anymore by discrete cash flows but by continuous dividend. Due to practical constraints, the VM is paid with a one day delay. This delay reduces significantly the effectiveness of the margin process as credit risk exposure reduction around the trade cash flow payments. This note presents an efficient and simple approach to bring back the effectiveness of the VM process even around trade flows dates. The approach is based on the usage of a forward valuation in the VM computation process.
Keywords: variation margin, trade cash flows, counterparty exposure, exposure spikes, bilateral margin regulation
JEL Classification: G13, G18, E44, C63
Suggested Citation: Suggested Citation