10 December 2013

ISDA: Standard initial margin model for non-cleared derivatives

In order to facilitate the introduction of final BCBS-IOSCO guidelines for "Margin requirements for non-centrally cleared derivatives", ISDA is proposing a standard initial margin model (SIMM) to be used by market participants.

A common methodology would have several key benefits to the market, according to ISDA, such as permitting timely and transparent dispute resolution and allowing consistent regulatory governance and oversight.

ISDA proposes to develop a standardised model which market participants can use that is better suited to the current purpose. The key aims of such a model include:

• Efficiency, speed, transparency and reproducibility
• Non-procyclicality
• Being governable and extensible
• Not limiting entry to market.

The SIMM will consist of the detailed directions for deriving portfolio Greeks, together with specifying the size of the risk factor shocks under each scenario, and the algorithm for implementing the aggregation function.

ISDA proposes from the outset to keep the model relatively parsimonious to ensure the model calculation does not impede trading and risk management and preserves transparency in dispute resolution, while meeting the objectives of the policy framework. As several of the requirements of the framework are globally deployed (such as application of thresholds across all trading at a counterparty group level), it is imperative that global regulators have a consistent approach towards application of the 99 per cent 10-day standard.

The successful development and deployment of such a model will require an agreement with regulators around issues discussed above such as calculations based on Greeks and a framework for approval via a number of reference portfolios and periods. The successful implementation of a standardised model also will require coordination among regulators in their model approval process.

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