ISDA SIMM Version 2.7: How will the SIMM recalibration affect initial margin requirements?

The recalibration of the ISDA Standard Initial Margin Model (SIMM) reflects the latest market risk assessments and is set to go live on 7 December 2024. SIMM 2.7 is expected to reduce initial margin requirements for most market participants, as the delta risk weights for asset classes such as equity, commodities and qualifying credit have been significantly decreased. This adjustment is mainly due to the exclusion of the volatile early pandemic period in the calibration of the model. The largest increases in risk weights will apply to high yield and non-rated credit non-qualifying assets and trades involving high-volatility FX currencies.

Although the recalibration generally will reduce margin requirements, there are many aspects to the model, making it difficult to anticipate how the numbers will move for everyone. For example, delta concentration thresholds that determine what positions are given higher weight in the risk calculations, are generally lowered across all assets. Hence, more positions will breach these thresholds and therefore be subject to increased margin, potentially impacting less diversified portfolios with large, concentrated positions. In contrast, higher vega concentration thresholds and lower vega risk weights will likely reduce exposure amounts for options, especially options that are more sensitive to implied volatility changes, hence lowering margin requirements.

Preliminary data from client portfolios shows up to 26% reductions in initial margin requirements, though the degree of benefit will vary based on portfolio composition. Overall, the reduced margin burden allows clients to allocate their capital more freely.

An interesting aspect of the recalibration is that some clients close to the €50 million initial margin threshold, the bilateral threshold at which firms are obliged to exchange initial margin with a certain counterparty, might remain out of scope for longer. Some clients that are currently above the threshold for posting IM could even be pushed back under and continue to monitor their IM.

On a final note, ISDA will start to update the parameters semi-annually after SIMM 2.7 to more effectively adapt the model to prevailing market conditions.

Ensuring a smooth transition with OSTTRA

OSTTRA triCalculate streamlines the move from the current SIMM version to version 2.7 by allowing clients to test the impact of the recalibration before it takes effect. Our comprehensive SIMM solution helps clients in navigating the evolving margin landscape effectively whether they are focused on margin exchange or on margin monitoring.

Our platform delivers accurate IM calculations with day-to-day variation tracking and offers a detailed breakdown per product, risk classes, sensitivities and buckets, giving users a better understanding of what is driving their IM amount. Clients can also run “what-if” analyses, including Pre-Deal Checks to assess potential impact of new or unwound trades, along with Market Data Stress Testing and Model Backtesting. Our continuous collaboration with clients enhances the user experience, focusing on clear and actionable risk insights to support better decision-making in collateral management.