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

See all articles by Marc P. A. Henrard

Marc P. A. Henrard

muRisQ Advisory; OpenGamma; University College London - Department of Mathematics

Date Written: April 1, 2018

Abstract

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

Henrard, Marc P. A., Variation Margin in Presence of Trade Cash Flows (April 1, 2018). Market infrastructure developments analysis, muRisQ Advisory. Available at SSRN: https://ssrn.com/abstract=3154329 or http://dx.doi.org/10.2139/ssrn.3154329

Marc P. A. Henrard (Contact Author)

muRisQ Advisory ( email )

Rue du Chemin de fer, 8
Brussels, 1210
Belgium

HOME PAGE: http://murisq.com

OpenGamma ( email )

Albert House
256-260 Old Street
London, EC1V 9DD
United Kingdom

University College London - Department of Mathematics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
109
Abstract Views
414
rank
246,741
PlumX Metrics