Rethinking Margin Period of Risk

Counterparty Trading Limits Revisited: CSAs, IM, SwapAgentt, from PFE to PFL

“…These spikes are from failure to return collateral following a termsheet payment. Andersen et al (2017) have pointed out that these spikes may mean that regulatory IM does not reduce exposure by 99%, but perhaps only by 90% in some cases.…”

“…is the value of the portfolio Π in the netting set of interest, considering cashflow timing assumptions δ B , δ C on termsheet and collateral and/or settlement flows, conditional on default (notation is given in Table 1). The cashflow types timing expands on Andersen et al (2017) to include initial margin flow timing and settlement flow timings. Thus our definition of PFE includes the effects of collateral, settlement, and initial margin (cleared or uncleared).…”

Haircutting Non-Cash Collateral

“…A margin period of risk (MPR) is a time period starting from the last date when margin is met to the date when the defaulting counterparty is closed out with completion of collateral asset disposal. MPR could cover a number of events or processes (Andersen, Pykhtin and Sokol 2016), including collateral valuation, margin calculation, margin call, valuation dispute and resolution, default notification and default grace period, and finally time to sell collateral to recover the lent principal and accrued interest. If the sales proceeds are not sufficient, the deficiency could be made a claim to the borrower's estate, unless the repo is nonrecourse.…”

Gap Risk KVA and Repo Pricing: An Economic Capital Approach in the Black-Scholes-Merton Framework

“…This is a simplified default timeline for modeling purposes. See Andersen, Pykhtin, and Sokol (2016) for a nice discussion of the margin and default timeline. Assuming that stock collateral is liquidated at the end of the margin period of risk u at a liquidation discount g representing a market liquidity premium, repo margin account would settle at an amount…”