October 28, 2019

IM Calculators at the Ready?

ISDA has published the ISDA SIMM™ Methodology, version 2.2, with an Effective Date of December 1, 2019. This version of SIMM includes updates based on the full recalibration and industry backtesting of the methodology.   It also includes additional granularity for the FX asset class, the removal of curvature margin from equity volatility indexes and an alteration to allow for annual calibration of credit non-qualifying intra-bucket correlations.

This means firms ought to update their SIMM implementations ready for December 1st in order to avoid reconciliation disputes between different versions of the SIMM model.

ClarusFT summarises the changes here:

  1. Full re-calibration and industry backtesting of the methodology
  2. Granularity for the FX class with high and regular volatility currencies
  3. Removal of curvature margin from equity volatility indexes
  4. Annual calibration of credit non-qualifying intra-bucket correlations

The re-calibration has resulted in most risk weights, correlations and concentration thresholds changing, meaning that the IM that firms calculate, collect and post will change after December 1, 2019.

This is the 6th public version of the ISDA SIMM methodology and as an ISDA SIMM Licensed vendor, we have supported all versions since 1.0 and our tools provide for easy comparisons between versions.

With almost every risk weight, correlation and concentration changing, it is impossible to know the impact on portfolios, without running the new version prior to it’s go-live. Before we show how to do that, lets highlight one change that is clear cut.

FX Class Change

In SIMM v2.1, a risk weight of 8.1 applied to all FX sensitivities or exposures, meaning that IM for an FX NDF was approximately 8.1% of notional.

SIMM v2.2, introduces groups of currencies, high volatility and regular volatility, which have risk weights of 10.28 or 7.57 respectively. Currently only BRL is in the high volatility group. There had been a possibility that KRW and TRY would also have been in this group, so these are ones to watch for in the 2020 calibration. In addition correlation for the high volatility group is reduced to 36.8% from the usual 50%.

So firms with BRL exposure, will see a significant increase in IM contribution from this currency (8.1% to 10.28%), while all other currencies will drop slightly from 8.1% to 7.57%.

For more information read this ClarusFT blog post. Also attached below is the SIMM v2.2 specification from ISDA which is also on this page.

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