Manuel Carrera Standardized Schedule calculations for IM

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[manucarreramoreno]

Implementation of the Standardized Schedule Method for Initial Margin Calculation in CDM - Release Notes

Standardised Schedule - Key Features

Background

The financial crisis that began in 2007 highlighted significant weaknesses in the resilience of banks and market participants to financial and economic shocks. To address these vulnerabilities and curb excessive risk-taking, the Basel Committee on Banking Supervision (BCBS) published the D499 document in April 2020, detailing new margin requirements aimed at reducing systemic risk and promoting central clearing. These requirements mandate that Initial Margin (IM) be calculated using either a quantitative model or a standardized method, ensuring uniformity and comprehensive coverage of counterparty risk.

What is being released?

The implementation of the Standardized Schedule Method for calculating Initial Margin (IM) within the Common Domain Model (CDM) is being released. This release introduces a structured approach to computing IM, providing a conservative and straightforward alternative for market participants who either lack the resources to develop quantitative models or prefer not to use third-party services.

Key components of this release include:

• New enumerations have been created to cover the asset typologies and subtypes of financial products included in this methodology.
• Functions have been developed to extract the duration and notional of financial products in accordance with specification D499.
• After extracting the necessary data, additional functions have been developed to compute the initial margin by integrating the extracted data with the model formulas.
• A package of examples of various covered products has been assembled to test the functionality of the implemented functions.

Data types

• Added new StandardizedSchedule type.
• Added new GrossInitialMarginAndMarkToMarketValue type.
• Added new CreditEvent type.

Enumerations

• Added new StandardizedScheduleAssetClassEnum enumeration.
• Added new StandardizedScheduleProductClassEnum enumeration.

Functions

• Added new AdjustableDateResolution function.
  • A fall back for unadjustedDate when adjustedDate is only available.
• Added new AdjustableOrAdjustedOrRelativeDateResolution function.
  • A fall back for unadjustedDate when adjustedDate is only available.
• Added new AuxiliarEffectiveDate function.
  • Extracts the effective date of specific products such as interest rate swaps and swaptions.
• Added new AuxiliarTerminationDate function.
  • Extracts the termination date of specific products such as interest rate swaps and swaptions.
• Added new BuildStandardizedSchedule function.
  • Takes a trade and uses qualification to extract the relevant information to populate the grid that will be used to calculate the gross initial margin.
• Added new DateDifferenceYears function.
  • Computes the difference in years between two dates. All years are supposed to have 365 days.
• Added new EconomicTermsForProduct function.
  • Extracts the economic terms from a product.
• Added new FXFarLeg function.
  • Extracts the far leg of an FX swap (deliverable or not) based on two criteria: the forward payout with the latest value date or the forward payout with the latest settlement date.
• Added new GetGrossInitialMarginFromStandardizedSchedule function.
  • Takes the grid information from an specific trade and calculates the gross initial margin.
• Added new GetIMRequirement function.
  • Computes the IM requirement, which is required in the calculation of the gross initial margin. It depends exclusively on the asset class of the trade and, in some cases, on the duration as well.
• Added new GetNetInitialMarginFromBaseCurrencyExposure function.
  • Computes the net initial margin, taking the gross initial margin result and the mark to market value."
• Added new IsCreditNthToDefault function.
  • Identifies a product as a CR basket Nth to default.
• Added new IsFXDeliverableOption function.
  • Identifies a product as an FX deliverable option.
• Added new IsFXNonDeliverableOption function.
  • Identifies a product as an FX non-deliverable option.
• Added new IsIRSwaptionStraddle function.
  • Identifies a product as an IR swaption straddle.
• Added new IsIRSwapWithCallableBermudanRightToEnterExitSwaps function.
  • Identifies a product as an IR swap with bermudan/callable right to enter/exit swaps.
• Added new ProductForTrade function.
  • Extracts the product from a trade.
• Added new StandardizedScheduleAssetClass function.
  • Identifies the asset class of a trade, according to the standardized schedule classification.
• Added new StandardizedScheduleCommodityForwardNotionalAmount function.
  • Extracts the notional amount of a CO forward. Floating price forwards not supported.
• Added new StandardizedScheduleCommoditySwapFixedFloatNotionalAmount function.
  • Extracts the notional amount of a CO fixed float swap.
• Added new StandardizedScheduleDuration function.
  • Extracts the duration of a trade, according to the product class-depending extraction method defined in the ISDA industry survey.
• Added new StandardizedScheduleEquityForwardNotionalAmount function.
  • Extracts the notional amount of an EQ forward.
• Added new StandardizedScheduleFXNDFNotional function.
  • Extracts the notional amount and currency of an FX non-deliverable forward.
• Added new StandardizedScheduleFXNDONotional function.
  • Extracts the notional amount and currency of an FX non-deliverable option.
• Added new StandardizedScheduleFXSwapNotional function.
  • Extracts the notional amount and currency of an FX swap.
• Added new StandardizedScheduleFXVarianceNotionalAmount function.
  • Extracts the notional amount of an FX variance swap.
• Added new StandardizedScheduleMonetaryNotionalCurrencyFromResolvablePQ function.
  • Extracts the notional currency for all products that have it populated in the resolvable priceQuantity.
• Added new StandardizedScheduleMonetaryNotionalFromResolvablePQ function.
  • Extracts the notional amount for all products that have it populated in the resolvable priceQuantity.
• Added new StandardizedScheduleNotional function.
  • Extracts the notional amount of a trade, according to the product class-depending extraction method defined in the ISDA industry survey.
• Added new StandardizedScheduleNotionalCurrency function.
  • Extracts the notional currency of a trade, according to the product class-depending extraction method defined in the ISDA industry survey.
• Added new StandardizedScheduleOptionNotionalAmount function.
  • Extracts the notional amount of a CO or EQ option.
• Added new StandardizedScheduleProductClass function.
  • Identifies the product class of a trade, according to the standardized schedule classification.
• Added new StandardizedScheduleVarianceSwapNotionalAmount function.
  • Extracts the notional amount of an EQ variance swap.
• Added new UnderlierForProduct function.
  • Extracts the underlier product.

Review directions

In the CDM Portal, select the Textual Browser and inspect each of the changes identified above.

In the CDM Portal, select Function and select the ones you want to test and upload a sample from our test pack.

[chrisisla]

Hi @manucarreramoreno,

I haven't had a chance to fully review this yet but it's a nice looking PR 🙂

My main question is really why this is all in a new namespace? The functionality being added looks pretty core to derivatives so should it not be in the core namespaces? There are also a few functions that look pretty generic and could be used by other functions in the model, so perhaps could be put elsewhere too (like into base.datetime).

Thanks!