The ISDA Standard Initial Margin Model (SIMM) Committee recently published a white paper outlining their initial thoughts as to how to develop a standardized IM model for uncleared derivatives. They are undergoing this initiative in order to provide the market with a common methodology for implementing the BCBS/IOSCO standards. ISDA wants to provide  "several key benefits to the market, such as permitting timely and transparent dispute resolution and allowing consistent regulatory governance and oversight." In September 2013, BCBS/IOSCO published their final recommended IM guidelines for uncleared derivatives, effective 2015. The main properties of their recommended model are as follows:

• 99% H-VaR
• 5y of historical returns, including a period of significant financial stress
• 10-day time horizon for returns

However, even with the BCBS/IOSCO guidelines, the way in which one can develop an IM model is open to a great degree of interpretation. Some essential implementation characteristics which need to be considered, in addition to those mentioned above, include:

• Which historical data sets will be used in the model?
• Which risk factors will be chosen in the model?
  • Too few may result in under-collateralization.
  • Too many may reduce the speed, and therefore the usefulness, of the model.
• On what level will different risk factors be offset against each other?
• Which valuation method should be used?
  • Full revaluation?
  • Taylor approximation using portfolio Greeks?

Therefore in order to minimize collateral disputes, which would certainly occur if the different parties implemented their own unique uncleared IM model, ISDA are seeking to facilitate the introduction of the SIMM to minimize differences as much as possible. In addition, the ISDA SIMM Committee is looking for the finally agreed upon IM model to possess the following stated criteria:

• Non-Procyclical
• Ease of replication
• Transparency
• Quickness of Calculation
• Extensible
• Predictability
• Reasonable Cost
• Governance
• Margin Appropriateness

Click to download and read the ISDA Standard Initial Margin Model Committee white paper.

-Ben L.