On Tuesday, 28th June, I posted a blog post about the impact of Brexit on OTC swaps cleared margin.
We anticipated that the impact of Brexit would progressively increase in magnitude over the subsequent days.
This post shows results from the period from 23rd to 29th June, and shows how the impact has now hit 25% for long-dated swaps change over this period. The analysis assumes the same 30Y GBP swap position as the previous post.
The graph below shows the change in the 30Y GBP Swap Rate, and how the five new VaR scenarios are created over the last 5 days.
The following graph shows the 25% change initial margin over the 5-day period. The green markers show the intraday movement in the forecast of the end of day Initial Margin at various observations through the day, converging on the actual end of day margin noted with the black cross.
The change in Initial Margin (IM) is caused by three factors:
1. Volatility Rescaling
This effect dominates the change in IM over the period, accounting for the vast majority of the change in IM over the period of analysis (between 23rd and 29th June).
2. Increase in PV01 due to fall in rates
Across the period of analysis, the PV01 increased by 7% which results in a similar contribution to the change in IM. Within this period, the PV01 increased by around 4% alone between 23rd and 24th June as rates fell on the Friday.
3. Inclusion of new scenarios in the VaR (Expected Shortfall)
The ‘Brexit’ scenario (5-day scenario starting on the 22nd of June) is only included in the Expected Shortfall on the 29th of June, and accounts for about 4% of the change in IM between the 23rd and the 29th of June.
Intraday calculation of Initial Margin
We work with firms that need to be able to predict end of day margin calls to enable them to better manage their funding requirements. We provide tools that take intraday market rates and will predict the next day’s margin call across all the main OTC CCPs.
This analysis shows that there is a specific need to model the impact of volatility rescaling on CCP margin in order to make meaningful predictions – in this case accounting for the vast majority of the 25% change in initial margin over this 7-day period.
Looking forward
Our analysis shows that the majority of the change in initial margin has been driven by the impact of volatility rescaling above other effects. This means that the impact of Brexit on initial margin will be a function of each specific CCP rescaling methodology.