Modelling Forward Initial Margin Requirements for Bilateral Trading

Justin Chan, Shengyao Zhu and Boris Tourtzevitch


Since the introduction of bilateral initial margin (IM) by Basel Committee on Banking Supervision and International Organization of Securities Commissions (BCBS–IOSCO), there has been great interest within the industry in developing a model that can dynamically forecast initial margin for future time horizons (Anfuso et al 2016; Andersen et al 2017; Caspers et al 2017). As the introduction of the additional margin requirement is essentially a mechanism to exchange counterparty credit risk with both the short-term collateral liquidity risk and the long-term collateral funding cost, an appropriate initial margin simulation model is essential for the sound management of credit risk management and capital calculation, as well as funding and liquidity risk management. In this chapter, we provide several practical approaches to simulating initial margin, as well as possible validation and backtesting methods and comparison results, with a particular focus on computing counterparty credit risk and regulatory capital.

The chapter is organised as follows: Section 8.2 discusses the challenges to forward simulating bilateral initial margin. Section 8.3 provides the

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