To Help 'Phase 3' Firms Comply with Initial Margin Rules, AcadiaSoft Releases Open-Source Code

Starting on September 1, 2018, so-called Phase 3 firms—which include mid-tier regional banks, asset managers and fund administrators—will have to post initial margin for all non-cleared derivatives transactions to comply with International Swaps and Derivatives Association (ISDA) guidelines. Phase 1 and 2 firms are already adhering to it as of September 2016 and ’17, respectively.

The ISDA Standard Initial Margin Model (SIMM) is designed to create a standard methodology for calculating initial margin that could also meet requirements of the regulatory framework set by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO).

The code, which is available on GitHub, will be updated on a regular basis to make sure that users are always on the latest version of the ISDA SIMM code. Users of the code will still have to first obtain a license from ISDA for production use of SIMM and US-based firms will need approval from their lead prudential regulator.

Mark Demo, product director at AcadiaSoft, says that while Phase 1 and 2 firms tend to be big global dealers or large regional dealers with hefty budgets and teams of quants on staff, Phase 3 firms are a mix of organizations that will have their own unique challenges.

Firms with limited resources will have to figure out how they will perform the calculations—in-house or through a third party. These guidelines, Demo says, will require firms to calculate sensitives on these trades, map those sensitivities to the standard risk buckets that SIMM requires, and then quants on staff must continually monitor the firm’s SIMM calculation versus its 10-day moving P&L average to make sure the firm is adhering to the rule’s 10-day 99 percent confidence level risk standard.

“That’s a big commitment,” Demo says. “What we’re learning with Phase 1’s and 2’s and how they’ve done it, versus 3’s, 4’s and 5’s, is that it’s going to be a little different because they’re firms with different levels of technical capability.”

In addition to open-sourcing its SIMM code, AcadiaSoft is also piloting a sensitivity calculation offering and an ISDA SIMM back-testing service. The sensitivity calculations are expected to be issued in Q1 2018, with the back-testing piece coming in Q2 2018. These services will be available to firms of all sizes, and are not exclusive to Phase 3. In fact, Demo says that Q1 firms are currently the ones piloting the back-testing service.

Demo says that by releasing this open-source offering to the public, it will hopefully help to bring in Phase 3–5 companies to try out the AcadiaSoft Expert Services, which includes an ISDA SIMM Approval Guidance service, and then try out the sensitivity calculations and back-testing once they are available.