Variation and Initial Margin in the ISDA Credit Support Annex

Gordon Lee, Piero Del Boca, Emma Jones and Sope Taiwo

Quantitative finance has evolved from pure derivatives pricing into a much more wide ranging discipline covering all facets of finance, from collateral agreements and risk management and valuation adjustments (XVAs) to more recent innovations in data science and artificial intelligence. Quantitative analysts (“quants”) are now found in many fields outside asset pricing (Lee 2017).

It is a testament to this trend that Michael Pykhtin and Leif Andersen, the two editors of this volume, received the prestigious “Quants of the Year” Award 2018, together with Alexander Sokol, for their work on whether initial margin (IM) eliminates counterparty risk (Andersen et al 2017). This award shows that the study of collateral is now front and centre for people working in quantitative finance.

In this chapter we shall give a brief history of the International Swaps and Derivatives Association (ISDA) and the documents they have produced, paying particular attention to the meaning of key definitions in the agreement documents. We shall cover the impact of bilateral margining regulations (Basel Committee on Banking Supervision and Board of the International Organization of Securities Commissions

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