The Impact of Initial Margin

Gregory, Jon

doi:10.2139/ssrn.2790227

Cited by 6 publications

(2 citation statements)

References 14 publications

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“…Since the BCBS-IOSCO released its guidance on margining for non-centrally cleared derivatives in March 2015, some recent works regarding the presettlement risk concentrate mainly on contracts collateral, especially different initial margin models 4 . Gregory (2016) analyzes the impact of initial margin and discusses the mechanics of initial margin calculations as well as some of the likely implications and potential problems associated with increased initial margin posting. Anfuso et al (2017) present a complete framework to develop and backtest dynamic initial margin models, they have shown how to obtain the forward looking IMs from the simulated exposure paths using simple aggregation methods.…”

Section: Literature Reviewmentioning

confidence: 99%

Utilization Schemes of the Pre-Settlement Risk Limits

Wybieralski

2024

JoFFL

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The purpose of the article is to investigate the selected method employed to manage the counterparty credit risk, namely the application of various risk limits. The aim is to recognize utilization schemes of the pre-settlement risk limits in the Polish OTC derivatives market in the relationship between a financial institution and a non-financial counterparty. They are used not only to cover the credit exposure but also to support and enhance the entire market risk management process and day-to-day operations in the financial institutions. Methodology. The research method comprises the analysis of recommendations of the Polish Financial Supervision Authority as well as reports, documents and market risk management principles of selected financial institutions (WSE listed banks). Results of the research. The study indicates two utilization schemes of the pre-settlement limit setup applicable both for daily and credit-related transactions. The first one assumes that the risk requirements remain unchanged during the contract lifetime, the second one considers variable risk requirements over time. Practical implications are discussed (in relation to a notional trade size, risk exposure and margining policy).

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Section: Literature Reviewmentioning

confidence: 99%

Utilization Schemes of the Pre-Settlement Risk Limits

Wybieralski

2024

JoFFL

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“…However, after the introduction of mandatory VM and IM, the high amount of collateralization results in CVA amounts that are virtually negligible compared to the monetary size of the transaction. Works by Andersen et al [4] and Gregory [10] estimate that the introduction of IM will reduce the expected exposure by approximately two orders of magnitude. Our numerical results support this estimate as can be seen in table 1 below.…”

Section: The Frameworkmentioning

confidence: 99%

An Enhanced Initial Margin Methodology to Manage Warehoused Credit Risk

Cipolina-Kun

Ruíz²,

Laris³

2018

SSRN Journal

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The use of CVA to cover credit risk is widely spread, but has its limitations. Namely, dealers face the problem of the illiquidity of instruments used for hedging it, hence forced to warehouse credit risk. As a result, dealers tend to offer a limited OTC derivatives market to highly risky counterparties. Consequently, those highly risky entities rarely have access to hedging services precisely when they need them most.In this paper we propose a method to overcome this limitation. We propose to extend the CVA risk-neutral framework to compute an initial margin (IM) specific to each counterparty, which depends on the credit quality of the entity at stake, transforming the effective credit rating of a given netting set to AAA, regardless of the credit rating of the counterparty.The proposed methodology is fully compliant with the risk-neutral pricing framework, enables improved risk management for dealers and, subsequently, a route for troubled institutions to access the derivative markets.By transforming CVA requirement into IM ones, as proposed in this paper, an institution could rely on the existing mechanisms for posting and calling of IM, hence ensuring the operational viability of this new form of managing warehoused risk. The main difference with the currently standard framework is the creation of a Specific Initial Margin, that depends in the credit rating of the counterparty and the characteristics of the netting set in question. In this paper we propose a methodology for such transformation in a sound manner, and hence this method overcomes some of the limitations of the CVA framework. Using a range of Swaps and Swaptions, we present realistic numerical examples of CVA values under margining, IM values as computed nowadays, as well as the new amounts of The authors would like to thank Andrew S.Dickinson, Martin Dahlgren and Wujiang Lou The opinions expressed here are those of the authors, and do not necessarily represent the view of their employers 1 arXiv:1812.09407v1 [q-fin.RM]

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2020

The xVA Challenge

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The Impact of Initial Margin

Cited by 6 publications

References 14 publications

Utilization Schemes of the Pre-Settlement Risk Limits

Utilization Schemes of the Pre-Settlement Risk Limits

An Enhanced Initial Margin Methodology to Manage Warehoused Credit Risk

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