Why the consequences of inadequate IM calculation should not be
underestimated
Achieving compliance with Uncleared Margin Rules (UMR) requires
a substantial effort. There are many elements to address, from
document negotiation to setting up segregated custody accounts as
well as putting in place a system for Initial Margin (IM)
calculation and collateral management. As a result, often the
issues of risk sensitivity and Standard Initial Margin Model (SIMM)
calculation lack the attention they deserve, and this oversight in
either over or underestimating a firm's IM amount can be
costly.
The highly technical nature of IM calculations may mean it is
often left to the most technical functions, such as the quants who
can decipher the IM models within an institution. However, there
are business, operational and reputational implications that can
arise from IM calculations, which warrant the attention of senior
management.
This whitepaper explores:
- Major challenges in calculating IM of different financial
instruments
- Impact of IM calculation quality on calculated IM amount
- Broader benefits of high-quality calculation beyond the
reduction of collateral disputes
- Adoption of the look-through approach
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