The Emergence and Concepts of the SIMM Methodology

Martin Dahlgren, Tomo Kodama

4.1 INTRODUCTION

The purpose of the IM of the UMR is to offset a large amount of potential adverse mark-to-market (MtM) movement that can occur over a “short” time horizon in the case of a credit event. The general guidance is given by the Working Group on Margin Requirements (WGMR), formed jointly by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), on margin requirements for non-centrally cleared derivatives (Basel Committee on Banking Supervision and Board of the International Organization of Securities Commissions 2015):

Margin requirements for non-centrally cleared derivatives would be expected to reduce contagion and spillover effects by ensuring that collateral is available to offset losses caused by the default of a derivatives counterparty.

Individual regulatory authorities across jurisdictions have since started to develop their own margin rules consistent with the final framework. The SIMM methodology developed by the ISDA WGMR risk classification and methodology (RCM) work stream aims to satisfy the regulatory requirements together with a variety of practical constraints and complications

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