The International Swaps and Derivatives Association, Inc. (ISDA) reports that it has launched a tender process to select a third-party to build and operate a crowdsourcing utility for the ISDA standard initial margin model (SIMM).
The utility is meant to “aggregate and compile risk data,” so that market participants can implement the ISDA SIMM “consistently,” ISDA says in a statement.
The SIMM was developed by the ISDA’s working group on margining requirements (WGMR), ISDA says, and it is intended to “help market participants meet new margining rules for non-cleared derivatives. By using a common methodology to calculate initial margin, counterparties can avoid the potential for disputes.”
The SIMM project is “focused on developing a common initial margin (IM) methodology that can be used by market participants globally,” ISDA says in a separate statement about the WGMR’s work.
“Unlike the calculation of variation margin, which is based on day-to-day valuation changes that are often directly observable, initial margin calculations very much depend on the choice of model and the assumptions used,” ISDA officials say.
“Under the framework set by the WGMR, firms can use their own internal models to calculate initial margin, as long as they meet certain criteria and obtain regulatory approval. These models have the potential to differ significantly, raising the possibility that counterparties will arrive at a different initial margin figure for the same trade. The result would be a surge in the number of disputes – and no obvious way currently in place to quickly resolve them. The SIMM provides an open, transparent, standard methodology that will be available to all,” officials add.
In its invitation to crowdsourcing-utility bidders, ISDA further says that the “value of crowdsourcing is that parties will use the consensus results instead of their own internal determination of risk buckets and weightings.”
ISDA will provide an invitation to tender (ITT) to parties interested in bidding to build and operate the crowdsourcing utility.
Interested firms should contact Tara Kruse tkruse@isda.org and Eleanor Hsu ehsu@isda.org by July 8, 2015 to receive the ITT document. The deadline to submit a tender response is July 30, 2015. ISDA expects to announce the successful bidder by September 10, 2015.
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