Standard Initial Margin Model for Non-Cleared Derivatives
Find Innovative SolutionsGenerate Solutions
Solution Overview
Problem
Current margin models for non-cleared derivatives lack standardization, leading to discrepancies and inaccuracies, making it difficult to achieve consistent regulatory governance and transparent dispute resolution across market participants.
Innovation Solution
A Standard Initial Margin Model (SIMM) is introduced, which calculates initial margin by determining delta, vega, and curvature margins for each risk class and uses these to compute an overall initial margin, providing a standardized methodology for global implementation and dispute resolution.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If firms use their own internal models to calculate initial margin, then flexibility and adaptability are improved, but consistency and reliability deteriorate due to significant discrepancy and variance among different internal models
Solution Approach 1:
The SIMM framework provides a universal initial margin calculation methodology that can be applied across all firms and jurisdictions. It defines standardized risk classes (interest rate, equity, credit, commodity, FX) and a common calculation approach using sensitivities and risk weights, ensuring consistent results while allowing firms to implement it within their existing systems
Solution Approach 2:
The SIMM transforms initial margin calculation from a model-specific approach to a parameter-driven approach. By specifying standardized parameters (risk classes, sensitivities, risk weights, correlation coefficients) and calculation formulas, it ensures that all firms arrive at the same results for the same portfolio, eliminating variance while maintaining computational flexibility
2Productivity
If risk-based margin models run quickly for morning margin calls, then productivity is improved, but measurement precision and transparency may deteriorate
Solution Approach 1:
The SIMM segments the initial margin calculation into distinct, transparent components: delta margin, vega margin, and curvature margin for each risk class. This segmentation allows the calculation to be performed efficiently in discrete steps while maintaining full transparency of each component's contribution to the total margin requirement
Solution Approach 2:
The SIMM introduces standardized intermediaries (risk classes, sensitivities, and risk weights) that mediate between the complex derivative portfolios and the final margin calculation. These intermediaries structure the calculation process to be both computationally efficient and transparently auditable, as each intermediary has a clearly defined role and can be independently verified
Data Source
AI summary
A Standard Initial Margin Model (SIMM) is calculated and provided as an overall initial margin for non-cleared derivatives. In certain embodiments, using at least one computing device, information associated with a plurality of risk classes is acquired, and a delta margin, a vega margin, and a curvature margin for each risk class based on the acquired information associated is determined. The at least one computing device calculates initial margin for each risk class by summing the respective delta margin, the respective vega margin, and the respective curvature margin. The at least one computing device determines whether product classes will be used in calculating the overall initial margin, calculates the overall initial margin using an equation based on the determination, and provides the overall initial margin. The amount of the initial margin call for the underlying derivatives contract may then be generated based on the calculated initial margin.