FIS Adaptiv: Exposure Monitoring in a Fully Margined World

In a perfectly margined world, variation margin (VM) and initial margin (IM) should cover both current and potential future exposure with a highdegree of confidence. In this case, under certain provisos, one may argue that exposure is reduced to zero.

The prospect of eliminating counterparty exposure through margining raises important questions for credit risk policy makers.

Is counterparty risk truly eliminated?

What other types of risk does margining give rise to?

What sort of limits and controls should be placed on margined trading activities?

Is A Post-Margin Reform World Free Of Counterparty Risk?

At the outset, it should be noted that not all products and not all counterparties are subject to the Margin Reform rules, hence an initial observation is thatcounterparty risk is not going to disappear from financial markets. Banks will still need to be able to measure and control counterparty exposures in the traditional manneron a signi cant portion of their derivatives portfolio, be it on exempt counterparties (e.g., corporate clients,smaller financial institutions, etc.), exempt products (e.g., physically settled FX), and even on CCP exposures (because initial margining is unilaterally in favour of the CCP), etc. Moreover, legacy trades in existing nettingsets are not necessarily migrated to new netting sets post-margin reform, in which case the transfer of credit risk into margined agreements could take years or decades to play out.

The full white paper is available at http://empower1.fisglobal.com/rs/650-KGE-239/images/WhitePaper_Margin_Risk_May-FIS.pdf

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