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October 3, 2013

Remembering Lehman: CCPs hardwire collapse into models – Risk.net

Does anyone remember Lehman? The market scenarios from Autumn 2008 built into many CCP IM models will now begin to drop out, reducing IM requirements for some products.

The effect is striking. “The magnitude of the change in margin as the Lehman default drops out of the lookback period depends on the portfolio. A portfolio with sensitivity primarily to the short end of the yield curve – which responded most dramatically to the default – can see a reduction of up to 80%, while reductions for longer-duration portfolios are typically more of the order of 20–30%,” says Andrew Hudson, credit risk and credit valuation adjustment product manager at SunGard.

Some IM models use market scenarios going back 5 years, with older scenarios dropping off day by day, therefore the period of volatility around the time of the Lehman default is ceasing to be present. Of course with a EWMA or GARCH scaling of scenarios, the change ought to be minimised, but it is interesting to note that SwapClear alone extended their historic period to 10 years. For background click over to the CCP margin models landscape, or for full story is over at Risk: Remembering Lehman: CCPs hardwire collapse into models – Risk.net. risk_logo


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