Clearing and bilateral collateralization of derivatives are gaining in importance.
Clearing and bilateral collateralization are two important instruments to lower the counterparty risk arising from derivative transactions and they are therefore integral components of the European Market Infrastructure Regulation (EMIR). As a countervailing factor, liquidity risks might arise from margin calls as a consequence of sudden events on the financial markets. Therefore, a forward-looking management of liquidity risk and collateral are essential for a bank’s ability to survive.
This subject will gain in importance in the coming years as more and more OTC derivatives are subject to mandatory clearing and the initial margin requirements gradually come into force alongside the variation margin for derivatives that have not been cleared.
There are challenges in connection with the initial margin requirements for uncleared derivatives, amongst others, in the segregation of collateral, the funding requirement for additional collateral, the implementation, validation and backtesting of internal initial margin models (e.g. ISDA SIMM), as well as agreement with counterparties about the level of the relevant margin calls.
Apart from regulatory requirements, there is a need to observe the commercial effects of the design of CSA contracts and the selection of diverse clearing houses or clearing brokers. With LPACalc, LPA’s own pricing library, it is possible to efficiently compute variations in the value of derivatives portfolios for different counterparties and CSA designs.
Thanks to a combination of long-standing experience in the capital markets, regulatory know-how and its own state-of-the-art pricing library, LPA Risk & Quant Consulting is the ideal partner to support you in implementing current and future challenges in clearing and collateral management.