ISDA SIMM to Move to Semi-Annual Calibration

The International Swaps and Derivatives Association (ISDA) says it is working towards recalibrating its Standard Initial Margin Model (SIMM) on a semi-annual basis rather than the current annual.

In a blog post, ISDA CEO Scott O’Malia reveals that following interest rate volatility at the end of 2022, ISDA conducted its first ever off-cycle calibration earlier in 2023, and is now preparing to make further changes. In coordination with global policymakers, ISDA will calibrate the model on a semi-annual basis from 2025 to ensure it remains risk appropriate and is updated in a predictable and efficient manner.

The original process for updating the ISDA SIMM, launched in 2016, was based on an annual calibration and backtesting exercise, in line with regulatory requirements. This was modified late last year to allow for off-cycle recalibrations.

“We appreciate that off-cycle updates are complex and unpredictable without any opportunity to plan for operational efficiency,” O’Malia writes. “As part of the off-cycle methodology, quarterly checks take place to determine if there has been a new market stress event and whether there is a material and systemic issue caused by low-risk weights that could lead to a significant under-margining of portfolios.

“If there has been a stress event and there is a material and systemic issue, then an off-cycle recalibration is performed for the main delta risk weights of the affected risk class, with a new version of the methodology effective six to eight months later,” he adds.

The move to semi-annual calibrations is aimed at establishing a more consistent and predictable approach, ISDA says, adding it will also look to make operational improvements through the process to ensure more efficient updates and adoption.

Under the new framework, there will be two calibrations: a primary and secondary calibration. The primary calibration will continue to assess all ISDA SIMM parameters while the other will evaluate the main delta risk weights. Each calibration cycle is expected to take 7.5 months, including a notification period required by some regulators for any changes to the model resulting from the calibration.

As currently planned, the primary calibration will occur in the first half of each year, effective in August, and the secondary review will run in the second half, with implementation in February.

“Whether off-cycle or semi-annual, we appreciate any adjustment to the ISDA SIMM methodology can pose challenges for users and typically requires a formal review of the changes by each firm’s internal model validation group, as well as the regulatory notification period,” O’Malia writes. “We are working with regulators to streamline the time frames so both updates can be accomplished within the year. We’re also looking at ways of making the experience as efficient as possible for market participants, so we expect the process to evolve over time.

“This new semi-annual calibration means the model will be reviewed and updated twice a year, irrespective of market conditions,” he concludes. “We will use the remaining time until 2025 to establish the new calibration frequency, which will lead to a more responsive industry model that continues to contribute to safe and efficient derivatives markets.”