Dynamic SIMM via Algorithmic Greeks Acceleration (AGA)

The impact of Initial Margin – Part 2

From September 2016 the financial industry is facing new regulation that is going to shape (again) the business of OTC derivatives: all tier-1 derivative dealers will have to post Initial Margin on their books of bilateral trades. From September 2020 nearly all financial institutions will have to comply. The Fed and ISDA have estimated the cost of this new framework in the many-billion zone.

In the second part of this paper we present a method that enables accurate and fast computation of MVA via a dynamic SIMM simulation inside the XVA Monte Carlo engine. We show how important a good SIMM simulation is by seeing its effect in an illustrative trade with strong Initial Margin funding Wrong Way Risk effects (a swaption). To our knowledge this is the only general method that exists to simulate SIMM dynamically (hence calculate MVA) in an accurate and timely manner.

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