Practical Approximation Approaches to Forecasting and Backtesting Initial Margin Requirements

Abstract

As BCBS-IOSCO's introduction of mandatory bilateral initial margin is expected to transform the bilateral OTC market, there has been a great interest in the market to develop a model that can dynamically forecast initial margin for future horizons. In the context of counterparty credit risk management and regulatory capital calculation, the authors propose practical methods to simulate initial margin requirements, along with validation and historical backtesting approaches applicable to a broad class of initial margin simulation methods.