What is Initial Margin requirement?

Initial Margin requirement is a component of the Unclear Margin Rules originated from the BCBS-IOSCO framework for OTC derivatives. The regulation was set up to reduce systemic risk from OTC derivatives. Initial Margin implementation comes into effect in six phases, with the last two going live on 1st of September 2021 and 1st of September 2022. Firms fall in scope for this requirement depending on their aggregate notional exposure of OTC derivatives, also known as AANA.

What is margin requirement?

Margin requirement on non-centrally cleared derivatives means that counterparties to a trade need to post collateral to mitigate credit risk. Margin requirement comes under the form of Variation Margin as well as Initial Margin. While Variation Margin has a purpose to cover immediate loss, Initial Margin aims to be an extra buffer to cover further loss until close-out. These have become daily requirements as part of the collateral management process of a firm.

How to calculate Initial Margin requirement?

Initial Margin (IM) can be calculated using either the industry ISDA SIMM methodology or the standardized Grid or Schedule methodology. While SIMM is a risk-sensitivity based model and takes the risk sensitivities of a portfolio as input to calculate its IM, Grid or Schedule IM is based on a static table of percentages (e.g., 2%, 5%, 15%) to be used as a multiplier to the notional. In scope entities can choose to develop an inhouse margin calculator or select a vendor as the provider for margin calculations.

What is the look-through approach or alternative approach when calculating Initial Margin?

Under ISDA SIMM calculation method for OTC derivatives based on indices (such as credit default indices, index options or index total return swaps), the look-through approach or alternative approach means that the calculation of risk sensitivities must be performed at the constituent level. The aim of this method is to reduce the final SIMM amount using the diversification effect of the basket. Using the look-through approach in practice can pose challenges both because its calculation is not straightforward to implement and because of the limited market data availability.

What is backtesting in the context of Initial Margin and ISDA SIMM?

As ISDA SIMM is a risk-based model, its effectiveness can only be validated by ongoing systematic backtesting. Backtesting is the generation of a statistical measure of the confidence level a given margin model such as SIMM represents in consideration of current market conditions and current risks held in a portfolio. Validation and performance monitoring using “backtests” need to be conducted on an ongoing basis, normally deemed quarterly, across various jurisdictions globally.

Initial Margin Calculation Workflow

Get in Touch

Accurate and fast trade calculations to efficiently manage portfolio margins

The mandatory exchange of initial margin for uncleared derivatives under BCBS/IOSCO guidelines is driving the requirement for accurate and fast margin calculations. There is a need to quickly assess the impact of proposed trades, calculate accurate initial margin for completed trades, and seamlessly manage the margin exchange workflow to efficiently manage portfolio margin.

To help address these needs, we provide:

Accurate Risk Sensitivities and Initial Margin calculations using the ISDA Standard Initial Margin Model (ISDA SIMM^TM) and Schedule based models.
Backtesting of SIMM over a historical period and Benchmarking of SIMM against the industry standard risk models to cover the Model Governance requirements.
Initial Margin monitoring providing an accurate and flexible way to track Initial Margin exposures. The service is designed to seamlessly evolve into a complete Initial Margin calculation service as thresholds increase.

Uncleared margin rules – Should only geeks care about initial margin calculation?

DOWNLOAD WHITEPAPER

Comply with Initial Margin requirements Learn more about how S&P Global can help you calculate Initial Margin.

Need customer support?

CONTACT CUSTOMER CARE

Margin Compliance

In an increasingly complex environment where both variation and initial margin need to be exchanged, we help you confidently address margin requirements while increasing efficiency across the enterprise.

Initial Margin FAQ

What is Initial Margin requirement?: Initial Margin requirement is a component of the Unclear Margin Rules originated from the BCBS-IOSCO framework for OTC derivatives. The regulation was set up to reduce systemic risk from OTC derivatives. Initial Margin implementation comes into effect in six phases, with the last two going live on 1st of September 2021 and 1st of September 2022. Firms fall in scope for this requirement depending on their aggregate notional exposure of OTC derivatives, also known as AANA.
What is margin requirement?: Margin requirement on non-centrally cleared derivatives means that counterparties to a trade need to post collateral to mitigate credit risk. Margin requirement comes under the form of Variation Margin as well as Initial Margin. While Variation Margin has a purpose to cover immediate loss, Initial Margin aims to be an extra buffer to cover further loss until close-out. These have become daily requirements as part of the collateral management process of a firm.
How to calculate Initial Margin requirement?: Initial Margin (IM) can be calculated using either the industry ISDA SIMM methodology or the standardized Grid or Schedule methodology. While SIMM is a risk-sensitivity based model and takes the risk sensitivities of a portfolio as input to calculate its IM, Grid or Schedule IM is based on a static table of percentages (e.g., 2%, 5%, 15%) to be used as a multiplier to the notional. In scope entities can choose to develop an inhouse margin calculator or select a vendor as the provider for margin calculations.
What is the look-through approach or alternative approach when calculating Initial Margin?: Under ISDA SIMM calculation method for OTC derivatives based on indices (such as credit default indices, index options or index total return swaps), the look-through approach or alternative approach means that the calculation of risk sensitivities must be performed at the constituent level. The aim of this method is to reduce the final SIMM amount using the diversification effect of the basket. Using the look-through approach in practice can pose challenges both because its calculation is not straightforward to implement and because of the limited market data availability.
What is backtesting in the context of Initial Margin and ISDA SIMM?: As ISDA SIMM is a risk-based model, its effectiveness can only be validated by ongoing systematic backtesting. Backtesting is the generation of a statistical measure of the confidence level a given margin model such as SIMM represents in consideration of current market conditions and current risks held in a portfolio. Validation and performance monitoring using “backtests” need to be conducted on an ongoing basis, normally deemed quarterly, across various jurisdictions globally.

Thought Leadership and Announcements

You may also be interested in

{"slidesToScroll": 1,"dots": true,"arrows": true,"autoplay":false}

Counterparty Manager

Engage with your counterparties; manage and share documentation, make regulatory representations and validate your data.

Learn more

OTC Derivatives Data

Optimize trades and valuations with our high quality, cross-asset data service for over-the-counter derivatives.

Learn more

Portfolio Valuations

Capitalize on high quality market data and independent valuations for a wide range of OTC derivatives, structured notes and cash products.

Learn More

{}

{"items" : [ {"name":"facts","url":"https://cdn.ihsmarkit.com/www/pdf/0623/Final-Initial-Margin-factsheet.pdf","enabled":true,"desc":"Download product information","alt":"Download product information","mobdesc":"PDF","mobmsg":"Download product information"},{"name":"login","url":"https://products.markit.com/home/login.jsp","enabled":true,"desc":"Product Login for existing customers","alt":"Login","large":true,"mobdesc":"Login","mobmsg":"Product Login for existing customers"},{"name":"sales","override":"","number":"[num]","enabled":true,"desc":"Call Sales [num]","proddesc":"[num]","alt":"Call Sales</br>[num]","mobdesc":"Sales","mobmsg":"Call Sales: [num]"}, {"name":"share","enabled":true,"desc":"<strong>Share</strong>","mobdesc":"Share","options":[ {"name":"facebook","url":"https://www.facebook.com/sharer.php?u=http%3a%2f%2fssl.ihsmarkit.com%2fmarketintelligence%2fen%2fmi%2fproducts%2fportfolio-valuations-initial-margin.html","enabled":true},{"name":"twitter","url":"https://twitter.com/intent/tweet?url=http%3a%2f%2fssl.ihsmarkit.com%2fmarketintelligence%2fen%2fmi%2fproducts%2fportfolio-valuations-initial-margin.html&text=Initial+Margin+Calculation+Workflow+%7c+S%26P+Global","enabled":true},{"name":"linkedin","url":"https://www.linkedin.com/sharing/share-offsite/?url=http%3a%2f%2fssl.ihsmarkit.com%2fmarketintelligence%2fen%2fmi%2fproducts%2fportfolio-valuations-initial-margin.html","enabled":true},{"name":"email","url":"?subject=Initial Margin Calculation Workflow | S&P Global&body=http%3a%2f%2fssl.ihsmarkit.com%2fmarketintelligence%2fen%2fmi%2fproducts%2fportfolio-valuations-initial-margin.html","enabled":true},{"name":"whatsapp","url":"https://api.whatsapp.com/send?text=Initial+Margin+Calculation+Workflow+%7c+S%26P+Global http%3a%2f%2fssl.ihsmarkit.com%2fmarketintelligence%2fen%2fmi%2fproducts%2fportfolio-valuations-initial-margin.html","enabled":true}]}, {"name":"rtt","enabled":true,"mobdesc":"Top"} ]}

Customer Logins

My Logins

Initial Margin Calculation Workflow

Accurate and fast trade calculations to efficiently manage portfolio margins

Margin Compliance

Initial Margin FAQ

Thought Leadership and Announcements

Avoid the rush – Don't let UMR implementation for phase 6 catch you off-guard

Regulation Asia Awards - "Highly Commended" in Initial Margin Compliance category

Take Control of Your Destiny – How to Put a Good Initial Margin Threshold Monitoring Solution in Place

UMR efficiency: optimising systems and processes for IM compliance

Asia Risk Awards - Margining Solution of the Year (S&P Global)

FAQ – UMR Compliance

Back to the (UMR) future

Partnership with OpenGamma

More Time for UMR Lends Opportunity to Establish Margin Optimization Strategies & Techniques

UMR Compliance and Optimization for Upcoming Phases 5 and 6 and Beyond

Regulatory relief, but the pressure is still on

Risk.net: Initial Margin – A regulatory bottleneck

Monitoring Your Initial Margin Exposure

Mayer Brown video: Calculating Initial Margin

S&P Global and Acadia® Announcement

Initial Margin: Five key considerations for Phase 4 and 5 firms

S&P Global Unveils Initial Margin Calculation Service

You may also be interested in

Counterparty Manager

OTC Derivatives Data

Portfolio Valuations