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Bilateral Margin Requirements, ISDA SIMM and Central Clearing

Day One

Background

  • The OTC derivatives market
  • Impact of the financial crisis
  • The clearing mandate
  • BCBS-IOSCO margin requirements
    • Requirements
    • Phase in
    • Thresholds

Case Study: Impact of bilateral margin requirements for banks under Phase I and II

Counterparty Risk and Risk Mitigation

  • Netting
  • Portfolio compression
  • Margin (collateral)
  • Variation margin
  • Initial margin (independent amount)

Case Study: Comparison of traditional bilateral clearing, central clearing and clearing under the new margin requirements

The Impact of Collateral

  • Discounting and collateral optionality
  • Impact of collateral on exposure
  • Rehypothecation and segregation
  • Collateral and funding
  • The impact of initial margin

Case Study: Comparison of collateral usage under traditional bilateral clearing, central clearing and BCBS-IOSCO rules

Mechanics of Bilateral and Central Clearing

  • History of central and OTC clearing
  • Contractual terms
  • Close-out process
  • The margin period of risk (MPR)
  • CCP loss waterfall and comparison to bilateral markets

Case Study: NASDAQ default fund losses


Day Two

Traditional Initial Margin Methods

  • Standard portfolio analysis of risk (SPAN)
  • Value-at-risk (VAR) and expected shortfall (ES)
  • Historical simulation
  • Example CCP methodologies
  • Potential problems
    • Procyclicality
    • Data history
    • Normal vs. absolute returns

Example: Initial margin calculation with historical simulation

The ISDA Standard Initial Margin Model (SIMM™)

  • The fundamental review of the trading book (FRTB)
  • Variance-covariance approximation to VAR and ES
  • SIMM methodology
    • Asset classes and risk classes
    • Risk weights and basis formula
    • Netting
    • Comparison to Historical simulation

Example: SIMM calculation examples

Initial Margin – Risk Reduction and Cost

  • Capital and SA-CCR
  • Reduction of counterparty risk (CVA)
  • Capital relief from initial margin
  • The cost of initial margin
  • MVA (margin valuation adjustment)
  • The CCP basis

Example: MVA calculation

The Impact of Netting and Margining

  • Bilateral vs. multilateral netting
  • Does multilateral netting reduce exposure?
  • The impact of variation margin
  • The impact of initial margin
  • Impact on CCP risk management
  • Risks of increase in margin requirements

Example: The impact of netting and margining on counterparty risk and CVA



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