Clarus Financial Technology

ISDA SIMM v2.2 – Are you ready?

Amir Khwaja

Version 2.2

ISDA have published ISDA SIMM v2.2. The main points are;

  1. Full re-calibration and industry backtesting of the methodology
  2. Granularity for the FX class with high and regular volatility currencies
  3. Removal of curvature margin from equity volatility indexes
  4. Annual calibration of credit non-qualifying intra-bucket correlations

The re-calibration has resulted in most risk weights, correlations and concentration thresholds changing, meaning that the IM that firms calculate, collect and post will change after December 1, 2019.

This is the 6th public version of the ISDA SIMM methodology and as an ISDA SIMM Licensed vendor, we have supported all versions since 1.0 and our tools provide for easy comparisons between versions.

With almost every risk weight, correlation and concentration changing, it is impossible to know the impact on portfolios, without running the new version prior to it’s go-live. Before we show how to do that, lets highlight one change that is clear cut.

FX Class Change

In SIMM v2.1, a risk weight of 8.1 applied to all FX sensitivities or exposures, meaning that IM for an FX NDF was approximately 8.1% of notional.

SIMM v2.2, introduces groups of currencies, high volatility and regular volatility, which have risk weights of 10.28 or 7.57 respectively. Currently only BRL is in the high volatility group. There had been a possibility that KRW and TRY would also have been in this group, so these are ones to watch for in the 2020 calibration. In addition correlation for the high volatility group is reduced to 36.8% from the usual 50%.

So firms with BRL exposure, will see a significant increase in IM contribution from this currency (8.1% to 10.28%), while all other currencies will drop slightly from 8.1% to 7.57%.

IBOR Fallbacks

Section C.1 of the methodology document has the following new addition, which is good to see:

“If fallback provisions take effect for a Libor or IBOR rate to an RFR-based fallback, then the relevant Libor sub curve should no longer be used for risk to that index and the OIS sub curve should be used instead. If fallback provisions take effect for a Libor or IBOR rate which is used in a standard cross-currency basis swap leg, then that leg should be redefined to use the RFR which would be used to calculate the fallback rate in the 2006 ISDA Definitions.”

Tools, tools, tools, …

One of the things we focus on at Clarus is ease of use and choice in how customers use our products.

We do the same for ISDA SIMM calculations. Users can choose from:

Lets look at each of these in turn for SIMM.

Excel

SIMM for Excel allows users to simply copy & paste a portfolio’s risk sensitivities in CRIF format and calculate SIMM v2.2 and v2.1 margin, to easily quantify the change.

SIMM for Excel

While the examples above all show IM decreasing by between 2% and 25%, it really depends on the actual risk exposure in a netting agreement. We have seen examples of the IM increasing by 10% or 15% or more, a material amount indeed when the IM is above the $50 million threshold or indeed in the hundreds of millions.

To learn more about Clarus SIMM for Excel click here. Prospective customers can sign-up for a free 14-day trial before purchasing, just start your free trial here. (Only for internal use, no vendors please, T&Cs apply).

Web App

For users wanting an out-of-the-box application, we have our CHARM service.

No installation, an easy to use Web App and the power and economics of the Cloud.

What to know which of your counterparties to do a trade with that increases IM the least?

We make it simple to enter a what-if trade, apply to any counterparty, determine the cheapest in IM terms and drill-down to a risk factor level to understand why.

CHARM GUI

In this case the IM posted to counterparty BankNO, would increase by only $2.4 million and the drill-down shows that this comes from the FX Delta contribution in the currency BRL with a correlation diversification benefit to the other currency positions in the netting agreement with this counterpart. Phew! That is much harder to describe in words than understand from the GUI above!

There is a lot more easy to use powerful functionality in CHARM.

If you are a prospective customer, just contact us to request a Demo and following that we can discuss a trial before on boarding you to the service.

Web API

Many firms are moving to a modern software stack. One where they leverage APIs, either internally built ones or provided by vendors. This new software stack utilises the Cloud and provides easy integration with modern scripting based languages e.g. Python.

Clarus Microservices provide exactly this for ISDA SIMM calculations.

The following three python lines will calculate SIMM 2.2 margin for an FX Option:

import clarus 
response = clarus.simm.margin(whatif='buy 3m 100m usdjpy call 108') 
print (response)

Returning:

SIMM         Margin Margin    4,489,260

What could be easier to integrate SIMM calculations into your software stack?

You never have to worry about maintaining and upgrading code for SIMM again.

Prefer a different language? We offer Java, R, Julia, Perl and more. Want to see and try more code examples? We provide a Sandbox with many examples for you to run, modify and experiment.

To read more about ISDA SIMM in Python, click here and to learn more about Clarus Microservices, click here.

Prospective customers can try free for 14-days before purchasing, just start your free Trial here. (Only for internal use, no vendors please, T&Cs apply).

That’s It

Excel, API or Web App, take your pick.

Try yourself or contact us for a demo.

Get ready for SIMM v2.2.

Join our customers.

It really is that simple.

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