In our last newsletter we asked readers to participate in a survey on margining. This produced some interesting results in regard to trends we see gaining momentum in the market in the near future: the rise of lifetime initial margin calculations, and an increasing need for independent CCP model implementation.
The vast majority – 68% – of those surveyed said they are factoring capital, liquidity, and margin into trade pricing. It shows us that the majority of respondents are increasingly aware of the funding and capital costs of collateralising initial margin with high-quality assets for the life of the trades. (You can read our previous blogpost for more on how smarter IM calculation can minimize capital allocation.)
With this in mind, we were interested in the time horizons the market is using to calculate initial margin impact before submitting a new trade. While 23% aren’t using any pre-trade calculation, 41% are using spot initial margin, and 36% are using Forward Initial Margin (up to 50Y). It was interesting to see that 64% of the respondents are not pricing in the fact that the margin will change over the life of the trade.
With regard to CCP model implementation, we found that only 27% of those surveyed currently validate and challenge CCP margin calls, while 41% validate only, and 32% do neither. In the previous three months 33% of respondents had challenged between 1 and 5 times, and just 5% each had challenged between 6 and 10 times or more than 10 times.
Given the substantial cost savings potential associated with independent validation, and also the implications for reducing systemic risk , we can only conclude that institutions do not yet have the tools to fully replicate initial margin models on an independent basis.