ISDA SIMM to Move to Semiannual Calibration

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

The ISDA Standard Initial Margin Model (ISDA SIMM) has proved to be robust since its inception in 2016, including during the succession of stress events since 2020. Following interest rate volatility at the end of 2022, we conducted our first ever off-cycle calibration earlier this year, but we’re now preparing to make further changes. In coordination with global policymakers, ISDA will calibrate the model on a semiannual basis from 2025 to ensure it remains risk appropriate and is updated in a predictable and efficient manner.

The original process for updating the ISDA SIMM was based on an annual calibration and backtesting exercise, in line with regulatory requirements. This was modified late last year to allow for off-cycle recalibrations, resulting in version 2.5A of the ISDA SIMM methodology. This was published on May 5, 2023 and implemented on July 15 after the first off-cycle calibration, which led to an update to the main interest rate delta risk weights.

Having gone through this process, however, we appreciate that off-cycle updates are complex and unpredictable without any opportunity to plan for operational efficiency. As part of the off-cycle methodology, quarterly checks take place to determine if there has been a new market stress event and whether there is a material and systemic issue caused by low risk weights that could lead to a significant under-margining of portfolios. If there has been a stress event and there is a material and systemic issue, then an off-cycle recalibration is performed for the main delta risk weights of the affected risk class, with a new version of the methodology effective six to eight months later.

To establish a more consistent and predictable approach, we are working together with market participants and policymakers to move to semiannual calibrations from 2025. We will also look to make operational improvements through the semiannual process to ensure more efficient updates and adoption.

Under the new semiannual framework, there will be two calibrations: a primary and secondary calibration. The primary calibration will continue to assess all ISDA SIMM parameters while the other will evaluate the main delta risk weights. Each calibration cycle is expected to take 7.5 months – although that includes a notification period required by some regulators for any changes to the model resulting from the calibration. As currently planned, the primary calibration will occur in the first half of each year, effective in August, and the secondary review will run in the second half, with implementation in February.

Whether off cycle or semiannual, we appreciate any adjustment to the ISDA SIMM methodology can pose challenges for users and typically requires a formal review of the changes by each firm’s internal model validation group, as well as the regulatory notification period. We are working with regulators to streamline the time frames so both updates can be accomplished within the year. We’re also looking at ways of making the experience as efficient as possible for market participants, so we expect the process to evolve over time.

This new semiannual calibration means the model will be reviewed and updated twice a year, irrespective of market conditions. We will use the remaining time until 2025 to establish the new calibration frequency, which will lead to a more responsive industry model that continues to contribute to safe and efficient derivatives markets.

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