From September 1, the new rules for margining uncleared derivatives are live – at least for US and Japanese companies (EU delayed the implementation earlier this year). The rules now cover only the initial margin, but March 2017 all participants will have to post variation margin as well.
One of the best known models for the initial margin model is SIMM – Standard Initial Margin Model by ISDA.
The interesting bit on this model is that it has changed quite a bit in the last year, and the final version very closely resembles FRTB SA.
Just as FRTB SA, it uses sensitivities to calculate (in effect) a parametric VaR with a few variation-like formulas.
That said, there are some subtle, but important differences.
Firstly, and very importantly, the asset classes aggregate trades, not risk factors. This is a very important fact, because it means that your CDS interest risk will not be offset by your IR swap. I believe that ISDA is in discussion with regulators to bucket risk factors, not trades, which would be a substantially better solution (amongst others, the decision of whether a trade is a credit or IR or equity etc. feel be a bit arbitrary).
SIMM also has a different number of asset classes than FRTB – there are only two credit asset classes, and FX and rates are treated as one asset class.
Last of the major differences is that SIMM of course has no default or residual charges – from that perspective, it would be more accurate to compare SIMM to Enhanced Delta Plus rather than FRTB-SA.
There is also a number of smaller differences in detail, such as
The above can invite a comparison where SIMM and FRTB’s EDP could share implementation. We believe this should be approached with some caution, for a few reasons:
Where we believe the approaches can provide saving is sharing the process calculating the standardised sensitivities, as there is a significant overlap.