19 November 2018
Bishal Thapa, triCalculate Sales
The new Initial Margin rules require the posting of initial margin for new OTC derivatives trades in every bilateral trading relationship. The funding of this initial margin comes at a cost, and MVA is the expected cost of funding initial margin all the way to the maturity of the longest trade in the netting set.
Why do I need to calculate MVA?
The mandatory exchange of regulatory initial margin (IM) continues to affect institutions of gradually decreasing size, with more banks being phased in every year. The largest firms started exchanging initial margin on September 2016, and as of October 2018 there are 51 entities currently in-scope. Hundreds if not thousands of firms will come into scope in September 2020.
The new rules require the posting of initial margin for new OTC derivatives trades in every bilateral trading relationship. The funding of this initial margin comes at a cost, and MVA is the expected cost of funding initial margin all the way to the maturity of the longest trade in the netting set.
Many of the clients we speak to in scope for bilateral initial margin are performing some calculation for MVA. Many are conservatively measuring their MVA numbers, but their portfolios of trades in scope are getting larger every day, making the MVA calculation increasingly important to get correct.
A significant amount of computational and quant resource is required to calculate MVA correctly. Many clients would need to spend months developing the calculation, then purchase servers at a significant cost to deal with this problem.
What are the solutions available to me to calculate MVA?
There are a few options for calculating MVA. Banks can build their own in-house solutions requiring an investment in resource and infrastructure and rarely results in a true reflection of the expected initial margin over time. A cheap alternative is to do proxy calculations, but this is not accurate and can cause mispricing or misinformation on the size of the MVA problem to senior management.
Banks don’t have to choose between spending lots of money and having inaccurate calculations – there is a way to get accurate calculations in a cost-efficient manner, and that is with triCalculate.
triCalculate does a full SIMM recalculation for initial margin at every point in the simulation, as opposed to using crude approximation. This level of accuracy is possible because of triCalculate’s sophisticated Probability Matrix Methodology and GPU hardware. And because we’re a web-based service, our solution is cost- and resource-efficient.
This year, we added functionality for CCP-MVA for initial margin costs associated with trading with central counterparties. triCalculate leads the market as a provider of MVA numbers for both bilateral and LCH or other CCP-cleared portfolios.