The Standard Initial Margin Model (SIMM), a methodology for calculating initial margin for non-cleared derivatives instruments developed by the International Swaps and Derivatives Association (ISDA) is a work-in-progress, confirms Scott O’Malia, ISDA CEO, in a new posting for the ISDA blog derivatiViews.
The need for new initial margin calculation requirements drove the creation of SIMM and its rollout in time for industry deadlines regarding the posting of initial and variation margin that began to kick in by September 2016.
ISDA also set up a member working group of representatives from major global firms taking part in the first phase of implementation, officials say. The development effort also involved broad representation from sell-side and buy-side firms “that will eventually be subject to the margin rules,” ISDA officials say.
But SIMM has already gotten a refresh.
“It was always recognized that regular updates and recalibrations would be necessary [for SIMM], in line with regulatory requirements. And an important set of updates was introduced this month,” O’Malia says in the April 18 posting.
The updated ISDA SIMM now covers “additional risk factors relating to cross-currency swaps, inflation swaps and collateralized debt obligation tranches, meeting a deadline set by U.S. regulators last year for the model to incorporate those risk factors,” says O’Malia, a former CFTC commissioner.
“This is an important development for the industry,” O’Malia adds. “Cross-currency swaps, in particular, comprise a large portion of the non-cleared derivatives market — roughly $15 trillion in notional, according to data reported to U.S. swap data repositories and compiled by ISDA SwapsInfo.org — and are widely used by end users to hedge their foreign currency exposures.”
If ISDA had not pushed for the SIMM updates, market participants would be compelled to “calculate initial margin on new cross-currency swap transactions using the much more conservative standard table set by regulators, resulting in punitive margin requirements,” O’Malia says. “This could have made this important hedging instrument uneconomic for some end users.”
As far as industry acceptance, O’Malia reports that seven months on, “the ISDA SIMM is being widely used by phase-one firms, and is expected to be just as broadly adopted by the second wave. That was the point of the ISDA SIMM: to develop a simple methodology that could be used by everyone.”
While he acknowledges that “a simple, industry wide model” will never have the extras of a model internally developed by a bank, SIMM usage should help firms sidestep the problems that would have come if firms developed multiple, “disparate methodologies.”
In particular, SIMM usage doesn’t promise the elimination of disputes but rather sets limits on them. “The fact that everyone is using the same simple, transparent model will make it easier to trace the causes of any differences,” O’Malia says.
The full text of his posting is at http://bit.ly/2o0kTjq.
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