Margin Management – Initial Margin for Swaps

Vega can help clients with determining Initial Margin (IM) amounts via ‘Dolphin’ Platform’s Margin Management module. It allows for seamless integration with external IM engines by providing functionality to capture calculated IM amounts by portfolios, by positions across swap products and for different CCPs and counterparties.

New IM calculation engines can be plugged-in seamlessly to existing derivatives system as CCPs come onboard and other bilateral counterparties for non-cleared swaps.

Value added functionalities include –

  • IM Reconciliation by broker to determine IM exposure across brokers and recon IM postings
  • ‘What If’ IM Scenario calculations – a key need for today’s fund managers before executing the trade to get the best outcome beforehand.

Margin management module supports calculation of IM for swaps traded at CME i.e. IRS, CDS, FX products.

Vega Knowledge base – Initial Margin for swaps


1. What is Initial Margin (IM)?

Initial Margin(IM) is the amount of collateral that firms need to post when trading financial Instruments such as futures or swaps. Unlike listed futures the Initial Margin posting for swaps is new and is mandatory in the US now as part of Dodd-Frank act.

2. How is IM settled?

The collateral amount of Initial Margin can be cash and/or securities and is usually defined in the collateral agreement called Credit Suppor Annex (CSA) between the parties.

In the case where the counterparty is an exchange (or CCP) the exchange determines the acceptable collateral types for each product.

3. Is IM for Swaps mandatory?

Initial Margin(IM) for Cleared swaps is mandatory in the US now. However, for Uncleared swaps IM is expected to be mandatory by September 2016.

In the US as part of the Dodd-Frank act the IM for Cleared swaps is mandatory. Globally it is becoming mandatory as regulations take effect.

For example in Europe IM will become mandatory by 2016 as EMIR regulations take effect. The IM for Uncleared swaps was initially expected to become mandatory by the end of 2015. However in early March 2015 the regulators (BCBS/IOSCO) gave an extension of nine months and it is now expected to be mandatory by September 2016.

4. Why should firms take Initial Margin seriously?

Initial Margin(IM) is now an additional cost to the firms that trade swaps. Firms need to provide additional securities and/or cash as collateral as part of IM when trading swaps.

The IM for Cleared swaps is mandatory in the US as part of Dodd-Frank act and the IM for Uncleared swaps will become mandatory in September 2016. Posting of accurate Initial Margin amounts will ensure that the firm is not under/over collateralized and will enable optimal use of its securities and cash for efficient portfolio management.

5. How is Initial Margin determined for Cleared swaps?

Initial Margin for Cleared swaps is calculated by models developed by the CCPs based on the various client specific factors such as credit risk, number and type of positions held at the CCP, etc.

In addition the model also takes into account other complex risk factors including but not limited to – the total positions held, number of clearing members and their perceived risks, etc. Click on below links to get a high-level overview of the margin methodology used by the various CCPs –

6. How is Initial Margin(IM) calculated for Uncleared swaps?

ISDA is working on a Standard Initial Margin Model (SIMM) to provide the market with a common methodology for the calculation for all Uncleared derivatives. This regulation is currently planned to be mandatory from September 2016. Below are links to regulations affecting IM for Uncleared swaps –

7. What are the front-office Initial Margin(IM) needs?

  • What-If Analysis – The ability to estimate incremental IM amounts dynamically by adding/deleting position(s)
  • Cheapest IM venue for execution – The best CCP/Broker for a cleared swap or the best broker for a Uncleared swap
  • Margin Optimization – Support for cross-product portfolio margining

8. What are the benefits of Initial Margin(IM) for the Front-office?

Reduced trading costs for cheapest to clear venues and review of What-If scenarios for Pre-trade analysis.

9. What are the Middle-office Initial Margin(IM) needs?

  • The ability to attribute correct IM to the cost of trade
  • To accurately calculate required daily IM amounts by Portfolio/Counterparty

10. What are the required Middle-office Initial Margin(IM) benefits?

  • To manage P&L better across business units and
  • To reduce funding costs

11. What are the required Back-office Initial Margin(IM) needs?

  • The ability to reconcile daily Initial Margin amounts with the Counterparty/CCP for all accounts
  • To report on total collateral needs(both IM and VM(Variation Margin)) to Collateral Management System
  • To provide collateral reports (IM and VM) by Account/Counterparty to interested parties
  • To provide details of calculated IM and VM amounts to downstream systems such as Accounting/Risk

12. What are the required Back-office Initial Margin(IM) benefits?

  • Automated verification and reconciliation of collateral amounts(IM and VM) by account and Counterparty

13. What should the front-office look for in a Initial Margin (IM) solution?

  • Can it determine the best CCP to execute the trade from an IM cost perspective?
  • Can it determine incremental margin before trade is executed i.e. can you perform a ‘What-If’ IM analysis?

14. What should the middle-office look for in a Initial Margin (IM) solution?

  • Can it accurately calculate IM for all accounts by counterparty and for various CCPs?
  • Can it provide calculated IM details to various back-office systems i.e. risk management, collateral, accounting, etc.
  • Can it create reports on calculated IM across various categories – by account, counterparty and/or by CCP?

15. What should the back-office look for in a Initial Margin (IM) solution?

  • Can you reconcile IM details daily to make sure you are not over/under-collaterized?
  • Can you get daily reporting on your IM by counterparty/CCP for Cleared swaps?
  • Can you get consolidated IM reporting by counterparty for both Cleared and Uncleared swaps?

16.  Key consideration #1 for performing Initial Margin (IM) for both Cleared and Uncleared swaps?

  • Are you positioning your firm to perform IM for both Cleared and Uncleared swaps?

17.  Key consideration #2 for performing #InitialMargin (IM) for both Cleared and Uncleared swaps?

  • Can your firm accurately attribute cost of trade with respect to IM to appropriate business unit?

18.  Key consideration #3 for performing #InitialMargin for both Cleared and Uncleared swaps?

  • Do you have a solution to support IM calculations provided by both – the CCPs for Cleared swaps and the counterparties for Uncleared swaps?

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