Margin in Derivatives Trading
First published:
ISBN: 978-1-78272-390-5
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Central Counterparty Risk
Matthias Arnsdorf
Central Counterparty Risk
Introduction
Variation and Initial Margin in the ISDA Credit Support Annex
Variation and Initial Margin Required by Central Counterparty Clearing Houses
Margin Requirements for Over-the-Counter Derivatives: A Supervisory Perspective
The Emergence and Concepts of the SIMM Methodology
The ISDA Standard Initial Margin Model Backtesting Framework
The Impact of Margin on Regulatory Capital
XVA for Margined Trading Positions
Modelling Forward Initial Margin Requirements for Bilateral Trading
Forward Valuation of Initial Margin in Exposure and Funding Calculations
Margin Value Adjustment for CCPs with Q-Simulated Initial Margin
Bilateral Exposure in the Presence of Margin
Central Counterparty Risk
Robust Computation of XVA Metrics for Central Counterparty Clearing Houses
Efficient Initial Margin Optimisation
Procyclicality in Sensitivity-Based Margin Requirements
Systemic Risks in Central Counterparty Clearing House Networks
12.1 INTRODUCTION
Central counterparties (CCPs) are a key part of the financial system. They have increased in significance since the 2007–9 financial crisis and are viewed as a key mitigant of credit risk and contagion while also providing increased transparency to the derivatives market.
As discussed in Chapter 2, CCPs are designed to reduce counterparty risk by holding high levels of collateral and by mutualising losses among clearing members. However, in extreme, stressed markets, the CCP funds may be insufficient to cover the portfolio losses of a defaulting clearing member. In these cases clearing members are exposed to concentrated tail risk and can incur losses on their default fund contributions and trade exposures. This does not necessarily require the default of the CCP itself.
This chapter is an extension of the framework introduced in Arnsdorf (2012, 2014), where we explore methodologies for quantifying the risk that a bank has when facing a CCP. Here we shall summarise the calculation of stress and expected exposures and look at how these measures can be applied in practice. In particular, we consider applications to stress tests such as the regulatory
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