Efficient Initial Margin Optimisation

Nishchal Devanur, Andrea Vidozzi


The introduction of the uncleared margin requirements (UMR) spurred a flurry of activity aimed at reducing and managing the initial margin (IM) requirements associated with over-the-counter (OTC) trading. In this chapter we provide an overview of the mainstream margin reduction strategies, with a particular emphasis on the case where the IM is calculated using the International Swaps and Derivatives Association (ISDA) Standard Initial Margin Model (SIMM).

The wave of changes in the regulatory landscape after the 2007–9 global financial crisis has brought fundamental changes to the OTC markets. For instance, the new UMR have introduced entirely new requirements on collateral arrangements, mandating the use of IM and variation margin (VM) for many financial entities (see Part II of this volume). This, combined with the increasing cost of trading through central counterparty clearing houses (CCPs),11As more and more trades get cleared, institutions start hitting risk and/or notional limits that trigger additional charges, such as liquidity, that may drastically increase the IM requirements. has been a catalyst for a foundational change in the way firms view

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