New margin regulations for the non-cleared OTC derivatives to reduce systemic risk across financial markets

LONDON and NICE, France and PARIS and SINGAPORE, June 27, 2016 (GLOBE NEWSWIRE) -- In a new publication entitled "Initial Margin for Non-Centrally Cleared OTC Derivatives - Overview, Modelling and Calibration," EDHEC-Risk Institute provides a detailed overview and analysis of the forthcoming new framework to be used by large financial institutions to determine initial margin (IM) and variation margin (VM) payments when trading non-cleared over-the-counter (OTC) derivatives. The Fédération Bancaire Française (FBF) supports the research chair on "Innovations and Regulations in Investment Banking" in which this research was produced.

Coming into effect in September 2016, this new framework was set out in 2015 and is based on the recommendations of the BCBS/IOSCO Working Group on Margin Requirements (WGMR). This framework has been in development since 2009, and was a response to the events of September 2008 which saw the bankruptcy of Lehman Brothers, the bailout of AIG and the federal takeover of Fannie Mae and Freddie Mac, all of whom had large exposures to the OTC derivatives market. The result of these regulations is that banks must hold initial margin collateral. This is intended to protect banks against any close-out loss on the bilateral set of non-cleared OTC derivatives that they would have with a defaulted counterparty.

The paper provides an overview of the new initial margin (IM) regulations that will come into effect in September 2016. Of the two proposed approaches, it explains why the model-based approach is the only framework that correctly captures the counterparty risk presented by non-centrally cleared OTC derivatives. It also sets out the modelling requirements specified by the WGMR, and discusses modelling implementation issues. In particular, the fact that the framework prevents the risk of assets with multiple market factors from being netted fully is discussed. Additionally, it describes the current IM model being developed by the International Swaps and Derivatives Association (ISDA). It then presents some model calibrations across a range of asset classes, performed in a manner that conforms to the WGMR requirements.

"Initial margin requires parties to post two-way collateral. Since our earliest discussions with the FBF on the question of initial margin, we favoured the idea of a market-wide standard model to avoid the risk of costly and time-consuming disputes between counterparties regarding collateral amounts. It was therefore very welcome to see ISDA lead such an initiative. Their modelling approach seems both reasonable and practically feasible", says the author Dominic O'Kane, an Affiliate Professor of Finance at EDHEC Business School. He also stated that "as the posted collateral cannot be reused, there are concerns about the impact of initial margin on market liquidity." He added, "This comes at a time when the demand for high quality collateral is increasing."

A copy of "Initial Margin for Non-Centrally Cleared OTC Derivatives - Overview, Modelling and Calibration" can be downloaded via the following link:

EDHEC-Risk Position Paper Initial Margin for Non-Centrally Cleared OTC Derivatives - Overview, Modelling and Calibration

This research was supported by the Fédération Bancaire Française (FBF) as part of the research chair at EDHEC-Risk Institute on "Innovations and Regulations in Investment Banking". This chair is providing advanced research in four areas: skewness as an asset class; corporate and sovereign credit default swap (CDS) markets; the evaluation of policies to regulate financial markets; and options on liquidity.

For more information, please contact: Maud Gauchon
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About the Fédération Bancaire Française (FBF)

The French Banking Federation (FBF) is an association which represents all French banks and foreign banks with operations in France in the form of subsidiaries or branch offices, whether they are European or from the rest of the world. It was formed in 2000 from the desire to bring together all companies in the banking sector - commercial banks already enjoying membership of the French Bankers Association (AFB) and cooperative and mutualist banks - in order to promote, with a single voice, the activity of the profession in France, Europe and internationally. Located in Paris, the FBF is also present throughout France via a network of 105 regional and departmental committees. It also maintains offices in Brussels, and a representative office in Frankfurt since November 2014.

  • 120 permanent staff work at the FBF and the AFB in conjunction with more than 350 bankers that come together in the FBF's commissions and committees. On the ground, 105 regional and departmental committees call upon the services of more than 2,500 bankers.
  • 378 banks are members of the FBF: universal banks, online banks, merchant banks, private banks, local banks, etc. Credit institutions licensed as banks and the branch offices of credit institutions in the European Economic Area can, it they wish become fully-fledged members of the FBF, which would then represent their professional institution. The central bodies of cooperative or mutualist banking groups and the AFB are also fully fledged members.

Since 2008, the French Banking Federation (FBF) has been supporting the academic researches dedicated to investment banking. In 2013 and for a period covering 2013-2017, FBF renewed its engagement and allocated substantial supports to three Chairs namely "IDEI Toulouse" dedicated to investment banking and markets, "EDHEC-Risk Institute" dedicated to derivatives and structured products and "Polytechnique / Evry" dedicated to market transition.


About EDHEC-Risk Institute

Since 2001, EDHEC Business School has been pursuing an ambitious policy in terms of practically relevant academic research. This policy, known as "Research for Business", aims to make EDHEC an academic institution of reference for the industry in a small number of areas in which the school has reached critical mass in terms of expertise and research results. Among these areas, asset and risk management have occupied privileged positions, leading to the creation in 2001 of EDHEC-Risk Institute, which has developed an ambitious portfolio of research and educational initiatives in the domain of investment solutions for institutional and individual investors.
This institute now boasts a team of close to 50 permanent professors, engineers and support staff, as well as 38 research associates from the financial industry and affiliate professors. EDHEC-Risk Institute is located at campuses in Singapore, which was established at the invitation of the Monetary Authority of Singapore (MAS); the City of London in the United Kingdom; Nice and Paris in France. The philosophy of the institute is to validate its work by publication in prestigious academic journals, but also to make it available to professionals and to participate in industry debate through its position papers, published studies and global conferences.

To ensure the distribution of its research to the industry, EDHEC-Risk also provides professionals with access to its website,, which is entirely devoted to international risk and asset management research. The website, which has more than 70,000 regular visitors, is aimed at professionals who wish to benefit from EDHEC-Risk's analysis and expertise in the area of applied portfolio management research. Its quarterly newsletter is distributed to more than 200,000 readers.

EDHEC-Risk Institute also has highly significant executive education activities for professionals. In partnership with CFA Institute, it has developed advanced seminars based on its research which are available to CFA charterholders and have been taking place since 2008 in New York, Singapore and London.

In 2012, EDHEC-Risk Institute signed two strategic partnership agreements, with the Operations Research and Financial Engineering department of Princeton University to set up a joint research programme in the area of asset-liability management for institutions and individuals, and with Yale School of Management to set up joint certified executive training courses in North America and Europe in the area of risk and investment management.

As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up ERI Scientific Beta. ERI Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.

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Press release New margin regulations for the non-cleared OTC derivativ


Source:EDHEC-Risk Institute