The ISDA Standard Initial Margin Model Backtesting Framework

Eduardo Epperlein, James McEwen, Wahb Ettoumi


Backtesting is the cornerstone of objective risk model validation, and is used by model developers, independent model validators and regulators as their principal tool for initial and ongoing model approval. In particular, for market risk capital models such as value-at-risk (VaR) and counterparty credit risk capital models such as the internal model method (IMM), there are well-established frameworks for backtesting-based model validation. The significant experience from capital models may conveniently be leveraged in creating the appropriate backtesting framework for the International Swaps and Derivatives Association (ISDA) Standard Initial Margin Model (SIMM).

As described in Chapter 4 of this volume, SIMM was developed by an ISDA-led industry group to capture the margin requirements over a ten-day margin period of risk at a 99% confidence level for non-centrally cleared derivatives. Following the guidance from BCBS/IOSCO (Basel Committee on Banking Supervision and International Organization of Securities Commissions 2013) that “margin requirements for non-centrally cleared derivatives would be expected to reduce contagion and spillover effects by ensuring

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