How is initial margin calculated for uncleared bilateral trades?

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AcadiFi · Accepted Answer

Initial margin (IM) for uncleared bilateral derivatives under UMR is calculated to cover potential future exposure during a 10-day margin period of risk at a 99% confidence level. Unlike variation margin (VM), which settles daily MTM changes and is essentially symmetric and small, IM covers the 'what if the counterparty defaults and I have to replace the portfolio' scenario. Two approved methods exist: ISDA SIMM (risk-sensitivity-based) and the standardized grid (percentage of notional by asset class and tenor). IM is posted gross by each party to a segregated third-party custodian — it's not offset against VM. For a $250M notional netting set with Sylvaris Federated covering IRS, FX forwards, and equity options, SIMM might produce $14M IM while the grid might produce $22M, typically making SIMM more capital efficient for well-diversified portfolios. UMR phased in based on Aggregate Average Notional Amount (AANA): Phase 6 (September 2022) brought the threshold down to $8B AANA. Once in scope, pairs only exchange IM once the calculated IM exceeds a $50M bilateral threshold. IM must be posted in eligible collateral with regulatory haircuts (1-8% depending on asset type), segregated from proprietary funds, and unavailable for rehypothecation. The operational build for IM — triparty custody, daily SIMM calculation, dispute resolution — is substantial. FRM Part II covers both methodology and regulatory context.

How is initial margin calculated for uncleared bilateral trades?

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