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Exploring the ISDA Standard Initial Margin Model | Numerix Video Blog - YouTube
Channel: numerixanalytics
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Jim Jockle (Host): Hi welcome to Numerix Video
Blog I鈥檓 your host Jim Jockle.
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Joining me today, Senior Vice President of
the Client Solutions Group here at Numerix,
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Satyam Kancharla.
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Satyam welcome.
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Satyam Kancharla (Guest): Hi Jim.
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Jockle: I want to talk about the recent publishing
in December of 2013, the ISDA document in
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terms of standard initial margin model for
non-cleared derivatives.
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And this was really a follow up to BCBS and
IOSCO paper that came out in September really
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around the margin requirements for non-centrally
cleared derivatives and as part of that directive,
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ISDA published a 9 criteria guideline.
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But also has some challenges based in here
as well.
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Could you give us a quick overview of some
of the criteria and what this document is
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meant to accomplish at this point.
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Kancharla: So well as you know, the Basel
Committee and IOSCO came up with this regulation
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for bilateral margin or the mandated margin
as a methodology for handling and reducing
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counterparty risk for bilateral trades as
well.
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We know for all cleared trades margining is
already in place and all the CCPs are implementing
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the margin models and banks are implementing
margin models, etc.
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But what the BCBS paper has cleared is the
requirement for margin in the case of bilateral
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models as well, in the case of bilateral trading
as well.
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And as a result, as we all know these trades
are quite complex and there鈥檚 a lot of variability
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in terms of how they鈥檙e priced, and on top
of that if you add the variability that comes
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into the picture because of the margin model
itself, and there are so many different options
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around how the margin model can be built.
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It could lead to a lot more confusion in the
market.
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It could lead to disputes around the pricing
and the margin calculations.
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And it could further make the OTC market structure
further complicated and difficult for participants
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which is why ISDA has come up with this principles
paper around creating a standard margin model
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and they鈥檝e identified some criteria of
what this standard model might be.
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Jockle: Now one of the key things and the
margin calculation requirements by the central
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clearers is proprietary to them, but this
mimics some of the standard requirements that
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market participants are facing when facing
off against the clearing house, is that correct?
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Kancharla: Absolutely.
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There is definitely a flavor to this whole
margin model which is aligned with and similar
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to what we have seen in CCP鈥檚 and also prior
to CCP clearing for swaps, even for the swap
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span model around futures and so on.
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So the goal of this model is to keep the calculations
more or less in alignment so that we can have
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apples to apples comparison.
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We can have some kind of a standard, but of
course this would apply to bilateral trades
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whereas the CCP models would apply to centrally
cleared trades.
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Jockle: So one of the questions I have though
is the document really also highlights a lot
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of the challenges there are in achieving this
standardized initial margin model.
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And one of the things in terms from when I
look at it is, the keyword is standard.
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Right?
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So yes we have standardization as it relates
to interest rate swaps.
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We have standardization against the stack
convention.
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What are going to be some of the challenges
other instruments are thriving under this
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umbrella or quotes of standardization?
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Kancharla: Exactly.
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I think what you鈥檒l see in the paper itself
and also the studies that have been done is
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that there is so much possibility of variation
that the impact of this margin process could
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be somewhere between half a trillion to 8
trillion Euros.
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So that just tells you how much the variability
can be just at the macro level in terms of
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the margin calculations.
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Now why is this variability taking place and
why is this variability in the model?
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That鈥檚 because first of all we must realize
that these are the hard to clear or the unclearable
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trades.
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So whereas in the CCP world, we鈥檙e still
talking about standard swaps and swaptions,
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and instruments like that.
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Here we鈥檙e talking about multi asset derivatives,
cross asset hybrid derivatives, equities,
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commodities, etc.
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So the product complexity is one, the risk
factor complexity is another, and then the
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VaR model, versus expected short fall, having
the exact definitions for risk factor upsets.
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Using greeks or not using greeks, so there
are a number of possibilities in terms of
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how this margin model can be implemented and
that鈥檚 where there鈥檚 a lot a variability
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and ISDA is rightly looking to make sure that
we streamline that and have some kind of an
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industry standard.
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Jockle: So clearly ISDA we鈥檙e following
where the central clearers are in terms of
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a similar model.
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But for bilateral trades how does this play
into the adaptation of the standard CSA.
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If we鈥檙e thinking on the opposite side of
the trade in terms of the variation margin,
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how are the two interacting together?
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Kancharla: Oh definitely I think having a
standard CSA really helps to streamline some
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of these calculations because obviously the
margin is supposed to provide a cover for
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any kind of systemic shock or counterparty
shock and having clear definitions around
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CSAs and standard definitions around CSAs
reduces complexity around optionality the
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CSA.
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And that will help to remove some of the complexity.
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Of course there is a lot of availability in
the margin model beyond what goes into a CSA,
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but having a standard CSA will definitely
help to reduce the complexity.
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Jockle: Okay.
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Well Satyam we鈥檙e definitely going to talk
about this a little bit more and I do want
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to jump down into different elements of the
criteria.
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There鈥檚 a lot to discuss, but we鈥檒l save
that for the next video blog.
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So we want to talk about the things you want
to hear about.
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So please again, follow us on twitter @nxanalytics
or on our blog and let us know so we鈥檙e
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covering all the elements.
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I鈥檓 going to ask you back into this chair
one more time and we鈥檙e going to break down
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into the nine elements of criteria.
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And with that I鈥檇 like to wish everyone
a good afternoon.
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Thank you.
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Kancharla: Thank you Jim.
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