Margin in Derivatives Trading
First published:
ISBN: 978-1-78272-390-5
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Systemic Risks in Central Counterparty Clearing House Networks
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
16.1 INTRODUCTION
The global financial crisis of 2007–10 had enormous implications for the financial ecosystem as a whole. Among many other changes to its way of working, both the range of products and the number of trades cleared by central counterparty clearing houses (CCPs) increased enormously (see, for example, US Office of Financial Research 2017). As a result, whether they like it or not, all large banks are engaged in trading on CCPs. Accordingly, there is a clear need for banks to assess any potential losses due to defaults of general clearing members (GCMs) and CCPs through the CCP network they participate in. The interconnectedness of the CCPs themselves, arising due to the fact that they are linked through common clearing members, means that it is important to model most of the network.
In this chapter, we take the perspective of a hypothetical banking group, “XYZ Bank”, and explain how it may assess its risks based on the partial information available to it. Typically, a banking group has multiple subsidiaries, each of which are distinct clearing members.
Understanding the risk of XYZ Bank is a challenging task, which requires
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