18 Sep 2016

By Marc Henrard

At the start of September, the mandatory bilateral margin rules for derivatives came into force in the US, Canada and Japan. Even if some jurisdictions decided to postpone their go-live, daily initial margins calls are now a reality for the main derivatives dealers.

If all financial institutions were using their own internal methodology for margin calculation, it would rapidly become a major problem as each firm would need to replicate all of their counterparties’ methodologies to validate margin calls. To reduce potential dispute issues arising from this situation, ISDA proposed SIMM™ (Standard Initial Margin Methodology) that could be used by all financial institutions impacted by the regulation. The methodology itself was developed by the ISDA WGMR and based on the standard Sensitivity Based Approach of the BCBS “Standards: Minimum capital requirements for market risk” (previously known as FRTB) .

Over the past few years, OpenGamma has been working with market participants on the calculation of Initial Margin requirements. Extending our offering to the bilateral space by implementing SIMM made a lot of sense. Since the publication of the first documents by ISDA, we have been keeping up-to-date with the changes to the methodology as it was being refined by the industry and have performed analysis on the impact for financial institutions .

In this blog, I would like to describe some of the SIMM-related initiatives OpenGamma have been involved in recently.

The library we have developed to implement SIMM is very lightweight (code is less than 300KB). It was designed to be integrated in other systems and with other libraries. For the projects below, we associated it with our open-source risk management library, Strata, for the computation of sensitivities.

We pride ourselves in our technology and derivatives expertise, and have been using both our open-source analytics (for the calculation of sensitivities) and SIMM implementation to deliver value to a variety of market participants:

  1. Analysis for a top-10 dealer: Comparing CCP and SIMM requirements
    In this engagement, we helped a Phase1 dealer with the preparation of the regulatory submission for their internal model (SIMM). The OpenGamma library allowed the bank to compare Initial Margin requirements between some CCP methodologies and SIMM. A similar type of analysis can be found here.
  2. Analysis for a global CCP: Bilateral rules on cross-currency swaps
    For this client, we provided an in-depth quantitative analysis of the new bilateral margin rules on cross-currency Swaps and a comparison with SIMM. The objective for the client was to assess bilateral margin requirements in the context of a new cleared product offering. We leveraged our experience with these products, our open-source library and our SIMM implementation to provide the analysis.
  3. Distributed Ledger POC: Bilateral margining in a Distributed Ledger world
    As part of this proof-of-concept, we explored how our risk analytics and margining libraries could be leveraged to increase automation and reduce collateral disputes. For this project, the lightweight, easy-to-integrate libraries helped.
  4. Supporting analysis for margin compression
    We worked with a bilateral margin compression company in their analysis of margin for multiple counterparties portfolios.

I will be speaking about these initiatives and SIMM at the ISDA Annual Conference on September, 20th. Please come by and say hello during the lunch break.

For further information, please contact me (marc@opengamma.com).

Our open-source library, Strata, can be found here .


The Author

Marc Henrard

Marc Henrard

Marc is Head of Quantitative Research at OpenGamma.


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