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, which is why they are integral components of the European Market Infrastructure Regulation (EMIR). However, the liquidity risks also increase which could arise from margin calls due to sudden events on the financial markets. A forward-looking liquidity risk management and collateral management is therefore essential.
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 the agreement with counterparties about the level of the relevant margin calls.
Besides adhering to regulatory requirements, it is important to observe the commercial effects that arise from the design of CSA contracts or the selection of different clearing houses or brokers. LPACalc, LPA’s own pricing library, enables variations in the value of derivatives portfolios to be computed efficiently for different counterparties and CSA designs.
With a combination of many years of 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.