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Webcast: Bilateral Margin Requirements - SIMM and MVA

Speaker: Dr Jon Gregory

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A course on this topic is available in London Time Zone, Singapore Time Zone and New York Time Zone

Webcast Agenda

  • Background to Uncleared Margin Requirements 
  • ISDA SIMM (Standard Initial Margin Model) 
    • Obtain sensitivities for all transactions
    • Calculate the IM for each risk factor
    • Aggregate the IM across tenors, currency
    • Aggregate over different risk factors (Delta, Curvature, Vega)
    • Aggregate across different risk classes
  • The Impact of Initial Margin and MVA


1. I'm wondering whether you would have any comments on the methodologies used by the dealers currently calculating the SIMM MVA with regards to the simulation of the forward IM profile? My understanding is that this topic currently attracts a lot of attention and is among the most controversial.
A. There are obviously relatively simple approaches to this such as just projected the future initial margin using current forward rates or basic regression approaches. Using AAD seems an obvious solution to do this more accurately, although the implementation is relatively complex. I don’t think most banks can yet take into account both portfolio effects and future variability of initial margin rigorously, although this is a topic attracting a lot of attention as you correctly point out.

2. Another question, related to "Move to central clearing?" Out of curiosity, any comments on the fact that the current SIMM approach excludes the physically settled FX component in a trade, and therefore all the cross-currency basis swaps with final notional exchange receive an incomparably more favourable treatment under SIMM as compared with a hypothetical clearing solution?
A. This exemption is heavily tied to the fact that cross-currency swaps cannot be cleared and therefore would be expected to be removed at some point.

3. To the extent you aware, what's the typical role of the market risk officer in the SIMM for the wave 1 compliant banks? Also, are there banks independently implementing the aggregation of SIMM without resorting to third-party vendor like Acadia Soft?
A. Yes, some banks have their own implementations also and this is linked to the Standardised Approach under the FRTB.

4. Which products that are not currently cleared would you expect to migrate to central clearing to reduce the IM (5d v 10d)?
A. Inflation swaps, interest rate swaps and possibly cross-currency swaps, and some FX (see previous answer) are some obvious examples.

5. Roughly how many firms are already wave 1 SIMM compliant and how many will be subject to the SIMM deadline by the end of 2017?
A. My understanding is that around 20 banks were wave 1 and further 6 will be impacted this year.

6. What are the charges / costs that can eventually be expected to be passed on to clients on a trade by trade basis? How can banks more effectively hedge these exposures to reduce cost / capital?
A. Initial margin charges on hedges will be most obviously passed on to the end-user clients. Whether this is explicit or just implicit depends on the situation (for example, for large trades I would expect a clear adjustment for the fact that the hedge(s) are subject to UME or central clearing). In terms of charging MVA on interbank trades it is clearly difficult and the lack of directionality and ability to optimise initial margins may make it less relevant. However, I would envisage that we see more ‘basis’ effects caused by different initial margin costs across the market.

7. Why we need to simulate future IMM?
A. We need to simulate the impact of future IM in an IMM approach to determine the reduction in the exposure in the future. We would need to simulate future IMM for KVA calculations.

8. Is it more efficient to centrally clear when faced with UMR compliance?
A. Probably yes. Due to 5- vs 10-days, netting benefit, reducing capital charges and the relative conservativeness of SIMM.

Thank you to those attendees who submitted their questions.

LFS offers 'Bilateral Margin Requirements, ISDA SIMM and Central Clearing' programme with Dr Jon Gregory in LondonNew York and Singapore.

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