Initial margin methodology
And as a result, as we all know these trades are quite complex and there’s a lot of variability in terms of how they’re priced, and on top of that if you add the variability that comes into the picture because of the margin model itself, and there are so many different options around how the margin model can be built. It could lead to a lot more confusion in the market. It could lead to disputes around the pricing and the margin calculations. And it could further make the OTC market structure further complicated and difficult for participants which is why ISDA has come up with this principles paper around creating a standard margin model and they’ve identified some criteria of what this standard model might be.
Jockle: Now one of the key things and the margin calculation requirements by the central clearers is proprietary to them, but this mimics some of the standard requirements that market participants are facing when facing off against the clearing house, is that correct?
Kancharla: Absolutely. There is definitely a flavor to this whole margin model which is aligned with and similar to what we have seen in CCP’s and also prior to CCP clearing for swaps, even for the swap span model around futures and so on. So the goal of this model is to keep the calculations more or less in alignment so that we can have apples to apples comparison. We can have some kind of a standard, but of course this would apply to bilateral trades whereas the CCP models would apply to centrally cleared trades.
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