The International Swaps and Derivatives Association (ISDA) announced it will calibrate the ISDA SIMM model on a semiannual basis from 2025 to ensure it remains risk appropriate and is updated in a predictable and efficient manner. This new semiannual calibration means the model will be reviewed and updated twice a year, irrespective of market conditions.
The original process for updating the ISDA SIMM was based on an annual calibration and backtesting exercise, which was modified late last year to allow for off-cycle recalibrations leading to an update to the main interest rate delta risk weights.
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, ISDA’s team is working together with market participants and policymakers to move to semiannual calibrations from 2025 and 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.
ISDA is also working with regulators to streamline the time frames so both updates can be accomplished within the year and looking at ways of making the experience as efficient as possible for market participants, so the process is expected to evolve over time.