**Finding Acceptable CCP Margin Model Parameters****Monday, February 4, 2-3pm, E62-687RSVP HERE**

The advent of mandatory central clearing for certain types of over-the-counter derivatives and margin requirements for others means that margin is the most important mitigation mechanism for many counterparty credit risks. Initial margin requirements are typically calculated using risk-based margin models, and these models must be tested to ensure that they are prudent. However two different margin models can calculate substantially different levels of margin yet both pass the usual tests. A more discriminating tool is therefore needed to justify the choice of parameters used in margin models.

A key feature of initial margin models is that they must predict the potential loss that a portfolio might suffer over some margin period of risk to a specified level of confidence. Often this prediction relies on the estimation of the conditional volatilities of various pertinent risk factors or on the definition of a set of risk factor returns to characterise their future dynamics. We show how to construct a probability distribution for the worst loss experienced over the margin period of risk in liquidating a portfolio conditional on either of these types of estimate. This allows us to calculate the probability of the empirical worst loss, and thus to construct a test based on the accuracy of the inferred distribution of worst losses. The test proposed is used on a variety of volatility estimation and margin calculation techniques applied to a long history of the returns of the S&P 500 index. Exponentially weighted moving average volatility estimation, generalised autoregressive conditional heteroskedasticity approaches and filtered historical simulation value-at-risk models are all considered. In each case a range of model parameters which give rise to acceptable risk estimates is identified.

*David
Murphy is the senior advisor in the Prudential Policy Directorate at the Bank
of England where he focusses on derivatives and quantitative risk management
issues. He is the author of numerous articles on risk management,
financial regulation and market infrastructure, recently focussing on central
clearing of OTC derivatives and its consequences. He co-chaired the FSB’s
Derivatives Assessment Team, whose final report on the post-crisis OTC
derivatives market reforms appeared in November 2018. His most recent
book, OTC Derivatives: Bilateral
Trading and Central Clearing, was published by Palgrave Macmillan in
2013.*

*His prior
roles include Global Head of Risk at ISDA, where he was responsible for all of
ISDA’s activities relating to capital, risk management and accounting standards
as well as leading ISDA’s research effort.*

*Before
that, Dr. Murphy was the Chief Operating Officer at Merrill Lynch’s Reinsurance
Group, and he has had held a number of other senior risk management roles in
leading banks and broker/dealers. He holds PhD and MSc degrees in
theoretical computer science and an MA in Physics.*