Journal of Financial Market Infrastructures

Risk.net

Initial margin estimations for credit default swap portfolios

Stanislav Ivanov

  • It is argued that simulation techniques for computing Initial Margin (IM) requirements at Central Counterparties are appropriate and needed.
  • Robust and capital efficient IM approach for portfolios of Credit Default Swap instruments is presented.
  • The approach features heavy-tailed asymmetric univariate distributions combined in a multivariate distribution via copula techniques.

In this paper, a clearinghouse framework to establish initial margin requirements for portfolios of credit default swap instruments is presented. The estimation of portfolio risk, attributed to credit spread dynamics, features large-scale Monte Carlo simulations. It is argued that copula-based Monte Carlo implementations possess certain advantages over alternative techniques. Copula-based Monte Carlo simulations are suitable for risk management applications at clearinghouses and provide a robust, capital-efficient and flexible modeling approach to assess the risk of complex portfolios.

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