Uncleared Margin Rules: Should only geeks care about Initial Margin calculation?

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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