Skip to main content
padlock icon - secure page this page is secure

Capturing initial margin in counterparty risk calculations


The full text article is not available for purchase.

The publisher only permits individual articles to be downloaded by subscribers.

This paper compares a range of alternative approaches to incorporate Initial Margins (IMs) in the modelling of counterparty credit risk exposures. IMs have risen in importance following the rise of Central Counterparties to clear OTC derivatives and the recent legislation requiring bilateral margining for uncleared derivatives between financial counterparties. IMs have become an essential model component that drives exposure, associated regulatory capital requirements and valuation adjustments such as Credit Valuation Adjustment (CVA) and Margin Valuation Adjustment (MVA). The influence of the modelling choices is explored by means of typical derivatives portfolios. For the actual estimation of a path-dependent (‘stochastic’) IM through time the use of quantile regression is suggested as an econometrically reliable approximation. Banks’ internal counterparty risk models will likely exhibit a basis vis-à-vis the actual IM mechanisms in practice (for example, owing to different risk factor representations and/or calibrations). In this context, the paper suggests that a simplified representation in the form of a ‘dynamic IM’ can approximate most of the quantities of interest to a reasonable degree.
No References
No Citations
No Supplementary Data
No Article Media
No Metrics

Keywords: initial margin, clearing, bilateral margining, counterparty risk, internal model

Document Type: Research Article

Publication date: March 1, 2017

More about this publication?
  • Journal of Risk Management in Financial Institutions is the essential professional and research journal for all those involved in the management of risk at retail and investment banks, investment managers, broker-dealers, hedge funds, exchanges, central banks, financial regulators and depositories, as well as service providers, advisers, researchers and academics. Guided by expert Editors and an eminent Editorial Board, each quarterly 100-page issue does not publish advertising but rather in-depth articles, reviews and applied research by leading professionals and researchers in the field on six key inter-related areas: strategic and business risk, financial risk, including traditional/exotic credit, market and liquidity risks, operational risk, regulatory and legal risks, systemic risk, and sovereign risk.

  • Editorial Board
  • Information for Authors
  • Subscribe to this Title
  • Contact us
  • Forthcoming content
  • Multi-user licences
  • Ingenta Connect is not responsible for the content or availability of external websites
  • Access Key
  • Free content
  • Partial Free content
  • New content
  • Open access content
  • Partial Open access content
  • Subscribed content
  • Partial Subscribed content
  • Free trial content
Cookie Policy
Cookie Policy
Ingenta Connect website makes use of cookies so as to keep track of data that you have filled in. I am Happy with this Find out more