Efficient ISDA Initial Margin Calculations Using Least Squares Monte-Carlo

TL;DR

This paper introduces an efficient method for calculating ISDA initial margin in OTC derivatives by extending Least Squares Monte Carlo to accurately estimate sensitivities, improving computational speed and accuracy.

Contribution

The paper presents an extension of the LSMC technique specifically tailored for ISDA SIMM sensitivity estimation, enhancing efficiency in initial margin calculations.

Findings

Significant reduction in computational time.

Improved accuracy of sensitivity estimates.

Enhanced scalability for large portfolios.

Abstract

Non-cleared bilateral OTC derivatives between two financial firms or systemically important non-financial entities are subject to regulations that require the posting of initial and variation margin. The ISDA standard approach (SIMM) provides a way for computing the initial margin. It involves computing sensitivities of the contracts with respect to several market factors. In this paper, the authors extend the well known LSMC technique to efficiently estimate the sensitivities required in the ISDA SIMM methodology.