Developing the ISDA SIMM was never going to be a one-time deal – for ISDA to roll it out for the September 2016 implementation, and then walk away. It was always recognized that regular updates and recalibrations would be necessary, in line with regulatory requirements. And an important set of updates was introduced this month.
The ISDA SIMM now includes additional risk factors relating to cross-currency swaps, inflation swaps and collateralized debt obligation tranches, meeting a deadline set by US regulators last year for the model to incorporate those risk factors.
This is an important development for the industry. Cross-currency swaps, in particular, comprise a large portion of the non-cleared derivatives market – roughly $15 trillion in notional, according to data reported to US swap data repositories and compiled by ISDA SwapsInfo.org – and are widely used by end users to hedge their foreign currency exposures.
Failure to make the required updates would have meant having to calculate initial margin on new cross-currency swap transactions using the much more conservative standard table set by regulators, resulting in punitive margin requirements. This could have made this important hedging instrument uneconomic for some end users.
Support for these additional risk factors – rolled out on April 1 – is part of a series of phased updates requested by US regulators at the time they approved use of the ISDA SIMM by phase-one firms last August. Given the need to also run a parallel annual recalibration and methodology review, the ISDA SIMM Governance Executive Committee opted to focus on those products and risk factors that ISDA members had highlighted as priorities and where the necessary data history existed – with cross-currency swaps top of that list.
With that achieved on schedule, attention will focus on the next set of deadlines and priorities, as well as meeting the September 2017 implementation date for the second wave of firms subject to initial margin requirements. The ISDA SIMM Governance Forum is working to identify those institutions affected, and to share knowledge and experience from the September 2016 implementation.
Seven months on from the first implementation date, the ISDA SIMM is being widely used by phase-one firms, and is expected to be just as broadly adopted by the second wave. That was the point of the ISDA SIMM: to develop a simple methodology that could be used by everyone. A simple, industry wide model will never be as sophisticated as a bells-and-whistles bank internal model, but it will cut down on the problems that could have occurred had everyone developed their own, disparate methodologies. It won’t eliminate disputes but it should limit them, and the fact that everyone is using the same simple, transparent model will make it easier to trace the causes of any differences.
The ISDA SIMM will continue to be a major priority for ISDA, and the ISDA SIMM governance framework will ensure the model continues to meet regulatory requests, responds to member feedback, and reflects changing market conditions in a transparent, inclusive way.
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