ISDA research argues that 10-day fixed liquidation horizon is not realistic

The International Swaps and Derivatives Association (ISDA) has published a new academic paper that analyzes the regulatory initial margin framework for the non-cleared derivatives market. The academic paper, sponsored by ISDA, was written by Rama Cont, Chair of Mathematical Finance at Imperial College London.  The paper examines the rationale for the 10-day liquidity horizon applied under the initial margin rules for non-cleared trades, and assesses whether it is appropriate. The 10-day period is double the five days set for cleared trades.

The research argues that using a fixed liquidation horizon of 10 days is not realistic, and does not take the liquidity characteristics of the assets or the size of the position into account. Instead, the paper recommends that the liquidation horizon should depend on the size of the position relative to the market depth of the asset. It also argues that IM should not be based on the exposure of the initial position over the entire liquidation horizon, but on the exposure over the initial period required to set up the hedge, plus the exposure to the hedged position over the remainder of the liquidation horizon.

Read the full paper

Related Posts

Previous Post
UST 10 year passes 3% milestone, securities lending picks up (Premium)
Next Post
Can Fixed Income ETF liquidity hold up against underlying liquidity changes? Panel respondents say yes

Related Posts

Fill out this field
Fill out this field
Please enter a valid email address.


Reset password

Create an account