Initial Margin Methods

Initial margins constitute a special, forward looking component of margin calls. They are calculated by central counterparties (CCPs) to compensate for potential losses in the liquidation process of positions from defaulted clients. The forward looking character of initial margins requires not only the pricing of positions, but also a market risk calculation covering the liquidity horizon of the relevant products.


Clearing houses have traditionally employed simple scenario matrix approaches to calculate the initial margin, e.g. the SPAN methodology from the CME or risk based margining (RBM) from Eurex Clearing. Due to the fact that the regulator extended the spectrum of centrally cleared instruments and also increased the requirements regarding their risk measurement, most leading clearing houses introduced complex, state-of-the-art market risk models. These models closely resemble the internal market risk models of banks. They allow the appropriate risk calculation for complex instruments, as well as the consideration of diversification effects of the complete portfolio.

Since clearing obligations for certain interest rate and credit default swaps have come into force the number of centrally cleared derivatives has been increasing and further increases are expected when central clearing becomes mandatory for even more product classes . Therefore the key risk figures are becoming more important for clearing clients. These clients need to be able to analyze their initial margins and replicate them for their customers. Moreover, in times of increasingly scarce collaterals, a sound understanding of the margin calls from the CCPs is essential.


This is equally important for non-cleared derivatives for which initial margins will also have to be collected and posted in the future. The corresponding rules are already in force for large banks and will become relevant also for other houses with non-negligible bilateral derivatives business in the next years. Bilateral initial margins can be computed by either using a simple but very conservative model proposed by the regulators or the standardized initial margin model (SIMMTM) proposed by ISDA. The latter is a sensitivity based market risk model resembling the standardized approach of the FRTB which on the one hand allows for better netting efficiencies and thus lower initial margins but on the other hand leads to increased efforts for IT, risk management, model validation, settlement and collateral management departments.


From our project experience in market risk, central clearing and bilateral derivatives business, we have a comprehensive overview and understanding of the models and the market standards used, both in the centrally cleared and the bilateral context. d-fine also offers you profound expertise of the operational requirements, the methods for analyzing initial margins and their embedding into settlement and collateral management processes. To receive detailed information call us on +49 (0) 69-90737-0 or email us at, with the subject line "Initial Margin Methods". We look forward to hearing from you!


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