Forward Valuation of Initial Margin in Exposure and Funding Calculations

Martin Dahlgren


In this chapter, we continue the discussion of Chapter 8, offering additional analysis and ideas on the complex topic of forward margin computation. Among other things, we here promote a particular pragmatic approach for calculating forward uncleared margin requirements (UMR) initial margin (IM) used in both exposure calculations and margin valuation adjustment (MVA). Unlike much other work in the area, we specifically consider the complexities associated with multiple active credit support annexes (CSAs) governing the trading relationship with a given counterparty. We also suggest simple valuation formulas for credit valuation adjustment (CVA) and MVA under the assumption of a perpetual static portfolio distribution, and consider business cases for when such an approach might be appropriate.

Since the BCBS–IOSCO (Basel Committee on Banking Supervision and Board of the International Organization of Securities Commissions 2015) uncleared margin requirements (often referred to in the industry as the “uncleared margin rules”) were first introduced on September 1, 2016, the default exposures on over-the-counter (OTC) derivatives have been reduced significantly

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