A widely-used model to calculate margin requirements may not accurately reflect the risk some funds face in unlisted trades according to the Bank Of England’s Prudential Regulation Authority (PRA).
A report by Bloomberg says the the PRA believes that some funds, including hedge funds, may need to post more collateral to comply with new margin rules that are set to come int force in the UK in September. The new regulations are widely expected to drive up costs in the $12.4 trillion derivatives market.
The reforms are aimed at cutting risk in the market following the global financial crisis, and will force firms with more than the equivalent of $8 billion uncleared, over-the-counter derivatives to post extra collateral, known as initial margin. The threat from under-collateralized positions were underscored by the implosion of Archegos Capital Management last year, which accumulated leverage through contracts that are traded off exchanges.
“Without firms taking action, some portfolios will risk being systematically under-margined,” PRA executives Duncan Mackinnon, David Bailey and Nathanael Benjamin wrote in a letter this week. “We will expect to see evidence that the risk of under-margining is being addressed by individual firms.”
The International Swaps and Derivatives Association, or ISDA, has defended the Standardised Initial Margin Methodology (SIMM) model it designed and currently manages and says it performed ‘robustly’ during recent period of market volatility.
SIMM was first introduced in 2016 but has been updated numerous time since.
