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The Impact of Initial Margin on xVA and Regulatory Capital

New opportunities and challenges related to collateral

The new uncleared margin rules (UMR) have a high impact on the OTC derivatives business, both economically and in terms of regulatory capital.

The phase-in of initial margin (IM) is progressing since September 2016 and steadily continues with the incorporation of smaller players and portfolios, reaching the € 8 billion threshold of notional volume in September 2022.

IM requirements lead to additional costs that are represented through the margin valuation adjustment (MVA). On the other hand, incorporating IM into the calculation of exposures can strongly reduce credit valuation adjustments (CVA) and debt valuation adjustments (DVA). This requires the dynamic modelling of IM within the exposure simulation.

Likewise, IM has a strong reducing effect for counterparty credit risk, which is calculated with either the standardized approach (SA-CCR) or an internal model approach. Hence, also the capital valuation adjustment (KVA) is affected and calls for a dynamic treatment of IM. This similarly holds for the new CVA risk charge, especially under the new standardized approach (SA-CVA). In our flyer on the impact of Initial Margin, we briefly cover all aforementioned effects of the introduction of bilateral initial margin.

d-fine has a long track-record supporting customers in questions related to initial margin, xVA, regulatory capital and exposure simulation. We provide expertise in both methodology and implementation, while staying on top of changes in regulatory requirements and current market trends.

You can download the flyer here.