Initial margin and the uncleared margin rules · RiskAtoms Academy

By the end you will be able to

1Explain what initial margin covers that variation margin cannot, and how much exposure a 99% initial margin leaves.
2Compute initial margin by the standardised schedule (with the net-to-gross ratio) and by a parametric 99% ten-day model.
3Follow SIMM's aggregation from sensitivities to one number: weighted sensitivities, correlations within a risk class, and product classes that add.
4State the uncleared margin rules: who is in scope, the phase-in, the €50m threshold, two-way exchange, segregation and no re-hypothecation.

Why it matters

Variation margin brings the bank's collateral up to yesterday's value. The last lesson showed what is left: the move over the margin period of risk, about 0.4 σ √MPoR on average and much more in a bad week. Initial margin is collateral posted up front to cover that move. With no initial margin, Saltney's expected positive exposure over its first year under the CSA is £1.53m. With a 99% ten-day initial margin it is £72k. Since 2016, the uncleared margin rules have made this exchange compulsory, in both directions, between the large firms in the market.

Core explanation

Covering the move at default

Illustrative dataRiskAtoms Bank plc's OTC derivatives book

Eight trades with four invented counterparties, in pounds, on one made-up valuation day, valued on 2,000 simulated paths (seed 34040) of a flat GBP rate (4.00% today), GBPUSD (1.30) and an equity index (8,000) every half month (about ten business days) out to ten years. The firms, trades and market model are made up for teaching; none is real data. The same book runs through every lesson in Module 3.4, so the figures agree.

Initial margin here is computed on the book's trades from today's sensitivities (bump and revalue) and from the 2,000 simulated paths. The margin period is one grid step, about ten business days.

Initial margin (IM) is sized to cover the change in a netting set's value over the margin period of risk (L3.4.06: The margin period of risk) at a high confidence level. The global standard, the BCBS-IOSCO framework for non-centrally cleared derivatives, sets that level at a one-tailed 99% over ten days, calibrated to include a period of significant financial stress. It is a quantile (M-C09: Quantiles): the move exceeded on only one day in a hundred.

How much does it leave? With a normal change of standard deviation $s$ over the margin period, the expected exposure with no IM is $0.399\,s$ . With IM at the 99% quantile, $2.326\,s$ , the bank is exposed only to the excess in the 1% tail, and the expected exposure is $0.0034\,s$ : a cut of 99.2%. The formal section derives this.

Two ways to set the number

The rules allow two routes. The standardised schedule charges a fixed percentage of notional:

Asset class and residual maturity	IM, % of notional
Credit, 0 to 2 years	2%
Credit, 2 to 5 years	5%
Credit, over 5 years	10%
Commodity	15%
Equity	15%
Foreign exchange	6%
Interest rate, 0 to 2 years	1%
Interest rate, 2 to 5 years	2%
Interest rate, over 5 years	4%
Other	15%

The schedule's only netting credit is the net-to-gross ratio (NGR): net IM = (0.4 + 0.6 × NGR) × gross IM. The NGR uses the trades' values, not their risks, so a perfectly hedged pair of new trades, both at zero value, gets no credit at all. The other route is a model: a firm's own, approved by its supervisor, or the industry's common one, ISDA's Standard Initial Margin Model (SIMM). Since both sides must post, and must agree on the amount every day, most firms in scope use SIMM: ISDA reports 426 groups of entities licensed to use it.

The book's four netting sets, priced every way the lesson uses:

Netting set	Schedule, gross	Book model, 99% 10-day	SIMM-style	Simulated: bank collects	Simulated: bank posts	Trades one by one, SIMM-style
Halvergate Manufacturing plc	£7.0m	£3.65m	£5.21m	£3.77m	£3.57m	£7.05m
Corriemoor Bank AG	£19.0m	£7.64m	£10.88m	£7.43m	£8.23m	£22.42m
Saltney Capital LP	£61.6m	£8.60m	£17.89m	£9.86m	£7.56m	£17.89m
Ebbsworth Pension Trustees Ltd	£12.0m	£10.19m	£14.36m	£9.57m	£10.63m	£14.36m

Three things stand out. The schedule is the most expensive almost everywhere, and wildly so for Saltney's option, where 15% of a £400m notional is charged on a position whose 99% ten-day move is about £10m. SIMM-style sits above the book's own 99% model, because SIMM's risk weights are stressed moves: the book's 99% ten-day move in the equity index is 8.4%, SIMM's weight for an index is 15%. And netting matters: Corriemoor's three trades need £22.4m one by one but £10.9m together, because its pay-fixed and receive-fixed swaps offset.

The uncleared margin rules

The uncleared margin rules came out of the G20's 2009 commitment to reform the over-the-counter derivatives market; the G20 added margin on uncleared trades to that reform in 2011. Trades that can be cleared go to a central counterparty (L3.4.08: Central counterparties); for the rest, covered firms (financial firms and systemically important non-financial ones) must exchange both kinds of margin. Variation margin, with a zero threshold, applied to the largest firms from 1 September 2016 and to all covered firms from 1 March 2017. Initial margin was phased in by size, measured by aggregate average notional amount (AANA) over March to May:

TimelineThe initial margin phase-in

1 / 6

1 September 2016

Phase 1: AANA above €3 trillion

The largest dealers start exchanging initial margin with each other on new trades.

Four more rules shape what happens in practice.

A threshold. Up to €50m of IM, measured at group level across all the trades between two groups, need not be collected. Saltney's SIMM-style IM of £17.9m is well below it, so the rules would require nothing; its £3m independent amount is the bank's own credit term.
Two ways. Both sides post. The bank collects from Corriemoor and posts to it; on the book's simulation the two amounts differ (£7.43m and £8.23m) because the value is not symmetric.
Gross, and ring-fenced. IM is exchanged gross, not netted against what the other side posts, and held under segregation. The collector may not re-hypothecate it, apart from one narrow exception.
Eligible collateral and haircuts. Cash, high-quality bonds and some equities, with the haircuts from L3.4.05: Collateral and the CSA.

Sort itDoes initial margin have to be exchanged?

Two phase 1 dealers, new 10-year swaps, SIMM IM of €400m between the groups.
A bank and Saltney, SIMM IM of £17.9m, both above the AANA for phase 6.
A bank and Halvergate, a manufacturer that is not systemically important.
A bank and a regional bank with AANA of €3bn.
Two banks swapping a cleared SONIA swap through a central counterparty.

The formal version

What initial margin leaves. Let the change in value over the margin period be $\Delta V \sim N(0, s^2)$ , with variation margin up to date at its start and IM held on top.

\begin{aligned} \text{EE} = \mathbb{E}\bigl[\max(\Delta V - \text{IM}, 0)\bigr] &= s\,\bigl[\varphi(k) - k\,(1 - \Phi(k))\bigr], \qquad k = \text{IM}/s \\ k = 2.326: \quad \text{EE} &= s\,[0.02665 - 2.326 \times 0.01] = 0.00339\,s \end{aligned}

The parametric IM. For sensitivities $\mathbf{s}$ (£ per bp in the rate, £ per 1% in GBPUSD and in the index) and the book's annual covariance matrix $\Sigma$ (M-C10: Covariance and correlation, as in L3.2.09: Parametric VaR for a portfolio), the 99% ten-day IM is

\text{IM} = z_{0.99}\,\sqrt{\mathbf{s}^\top \Sigma\, \mathbf{s} \times \tfrac{10}{250}}

\Sigma = \begin{pmatrix} 8{,}100 & 243 & 324 \\ 243 & 81 & -48.6 \\ 324 & -48.6 & 324 \end{pmatrix}, \qquad \Sigma_{ij} = \rho_{ij}\,\sigma_i\,\sigma_j

Rate vol 90bp a year, GBPUSD 9%, index 18%; correlations 0.3 (rate, FX), 0.2 (rate, index) and −0.3 (FX, index). Rows and columns are the rate (bp), GBPUSD (%) and the index (%), so the entries are in bp², %² and bp × %.

The schedule. With $N_i$ the notional and $m_i$ the schedule rate of trade $i$ , and $V_i$ its value to the bank:

\text{IM}_{\text{gross}} = \sum_i m_i N_i, \qquad \text{NGR} = \frac{\max\bigl(\sum_i V_i,\ 0\bigr)}{\sum_i \max(V_i,\ 0)}, \qquad \text{IM}_{\text{net}} = (0.4 + 0.6\,\text{NGR})\,\text{IM}_{\text{gross}}

SIMM in outline. SIMM works from sensitivities in six risk classes (interest rates, credit qualifying, credit non-qualifying, equity, commodity, FX) and four product classes (RatesFX, credit, equity, commodity). For delta risk:

Version 2.7 parameters for the factors this book has: interest rate risk weights for a regular-volatility currency of 68bp (2 years), 66bp (3 years), 61bp (5 years), 59bp (10 years), 56bp (15 years); tenor correlations 0.94 between 5 and 10 years and 0.9 between 2 and 5; FX 7.3%; an equity index 15%; and ψ = 0.09 between interest rates and FX. A swap's PV01 is split between the SIMM tenors either side of its maturity. Full SIMM adds vega, curvature, concentration thresholds and more; the lesson leaves them out.

Try it

Start from a counterparty's trades, then tick and untick trades to build your own netting set. Move the markets to change the trades' values: the schedule's NGR moves, SIMM barely does.

Try itPrice the initial margin on a netting set

Start from a counterparty's trades

Trades in the netting set (tick or untick to build your own)

T1 Receive-fixed swap, £100m, 7 years at 4.00%T2 Buy $65m for pounds in 1 year (at market)T3 Pay-fixed swap, £250m, 10 years at 4.00%T4 Receive-fixed swap, £150m, 5 years at 4.00%T5 Sell $130m for pounds in 3 years (at market)T6 Long 2-year index put, strike 7,200, 5,000 units at £10 a pointT7 Pay-fixed swap, £80m, 5 years at 4.00%T8 Pay-fixed swap, £300m, 10 years at 4.00%

Move the GBP rate0bp

Move GBPUSD0%

Move the equity index0%

SIMM-style: interest rates£2.17m
SIMM-style: FX£0.00m
SIMM-style: equity£15.71m
SIMM-style IM (after diversification inside RatesFX)£17.89m

Standardised schedule, net£61.60m

SIMM-style, delta only£17.89m

Schedule, gross£61.60m

Net-to-gross ratio (NGR)100%

Book model, 99% 10-day (parametric)£8.60m

Sum of each trade's SIMM-style IM£17.89m

The schedule charges a fixed share of each trade's notional and gives netting credit only through the NGR, which needs some trade to have value: move a market slider to see it. SIMM-style uses the trades' sensitivities with SIMM v2.7's risk weights and correlations for the factors this book has, delta only. The parametric figure uses the book's own vols and correlations.

Worked example

Saltney, four ways

Saltney's netting set: a long two-year index put (strike 7,200, 5,000 units at £10 a point, index 8,000), worth £18.98m to the bank, and an £80m five-year pay-fixed swap at par. Its CSA has a zero threshold and a £3m independent amount.

From trades to initial margin

Step 1 of 6

1
Sensitivities
Bumping and revaluing: £35,615 per bp rise in the GBP rate (from the swap) and −£1,047,545 per 1% rise in the index (the put's delta).

No initial marginThe CSA's £3m independent amountSimulated 99%, about ten daysSIMM-style (delta only)

EE at six months: £1.59m, £0.66m, £71k and £1.9k. The put settles at two years, so the chart stops just short.

Regulatory lens

The rules come from the BCBS-IOSCO framework, Margin requirements for non-centrally cleared derivatives, first published in 2013 and last revised in April 2020 with the final phase-in dates; each jurisdiction writes its own version. In capital rules, initial margin a bank holds reduces its exposure at default under SA-CCR, and initial margin it posts is itself an exposure unless it is bankruptcy-remote (M4.4: Counterparty, operational and large exposures). Central counterparties set their IM to their own rules, at least 99.5% over at least five days for OTC derivatives in the EU (L3.4.08: Central counterparties). The cost of funding initial margin over a trade's life, MVA, is in M6.6: Counterparty risk and XVA.

Spark Atoms

Spark AtomStatic margin at Archegos

Archegos Capital held its positions through total return swaps with its prime brokers. Credit Suisse set the margin on those swaps when each trade was booked and did not change it as the positions grew and concentrated; in 2019 it had cut the average margin from about 20% to 7.5%. When Archegos failed in March 2021, Credit Suisse lost about $5.5bn. A risk-based IM, recalculated daily, would have grown with the positions.

Spark AtomHalf a trillion dollars, mostly in bonds

ISDA's margin survey counted $524.7bn of initial margin collected for uncleared derivatives by leading derivatives firms at the end of 2025. Unlike variation margin, which is mostly cash, 52.6% of it was in government securities: if IM sits with a custodian and cannot be re-used, it might as well be in assets that earn a return.

Spark AtomTwice a year

ISDA recalibrates SIMM's risk weights and correlations to recent and stressed market data. From 2025 it moved from once a year to twice, so a stressed market reaches the model sooner. The 15% equity-index weight used here is from version 2.7; later versions differ.

Key takeaways

Initial margin covers the move over the margin period of risk that variation margin cannot. At a 99% normal quantile it cuts expected exposure by about 99%.
The standard is a one-tailed 99% over ten days, calibrated to include stress. Firms use either the schedule or a model, usually ISDA SIMM.
The schedule charges a percentage of notional, netted only through (0.4 + 0.6 NGR); it is far larger than a model for options and for hedged books.
SIMM: weighted sensitivities, combined with correlations inside a risk class, ψ across risk classes in a product class, and product classes that add.
Saltney: schedule £61.6m, book model £8.60m, SIMM-style £17.89m, simulated £9.86m; first-year EPE falls from £1.53m to £72k.
The rules: phased in from 2016 to 2022 down to €8bn AANA; a €50m group threshold; posted both ways, gross, segregated and not re-hypothecated.

Reaction

Check what stuck

Question 1 · objective 2

Under the standardised schedule, a netting set holds a £200m 7-year interest rate swap (4% of notional) and a $100m FX forward (6%), with GBPUSD at 1.25. The net-to-gross ratio is 0.5. What is the initial margin, in £m?

£m

Question 2 · objective 2

A netting set's value has an annual standard deviation of £20m. Using a normal model with 250 business days a year, what is its 99% ten-day initial margin, in £m?

£m

Question 3 · objective 3

Two interest rate weighted sensitivities in the same currency are £6m and £8m, and the tenor correlation between them is 0.5. What is K for the risk class, in £m?

£m

Question 4 · objective 4

Saltney's SIMM-style initial margin is £17.9m. Under the uncleared margin rules, what must the bank collect?

ANothing is required: it is below the €50m threshold, though the bank may still agree to collectBThe full £17.9mC£17.9m less €50m, which is negative, so the bank pays SaltneyDThe schedule figure instead, since it is larger

Question 5 · objective 4

Why is initial margin posted to a custodian rather than paid to the collecting bank, as variation margin is?

ASo that it is still there if the collecting bank itself failsBBecause custodians pay a higher interest rateCBecause initial margin must be posted in goldDSo that the collecting bank can lend it on

Glossary

Initial margin (IM): Collateral posted on top of variation margin to cover the change in value a counterparty's trades could undergo between its default and their close-out, sized at a high quantile of that change.
Uncleared margin rules (UMR): The uncleared margin rules: national rules, built on the BCBS-IOSCO framework, that make covered firms exchange variation and initial margin on derivatives not cleared through a central counterparty.
Standardised schedule: The standardised table of initial margin as a percentage of notional, by asset class and maturity, with netting credit only through the net-to-gross ratio.
Net-to-gross ratio (NGR): Net-to-gross ratio: the netting set's net replacement cost divided by the sum of the positive values of its trades.
ISDA SIMM: ISDA's Standard Initial Margin Model: a sensitivity-based model that weights each sensitivity by a stressed move and aggregates with prescribed correlations. Most firms use it for the uncleared margin rules.
Weighted sensitivity: Weighted sensitivity: a sensitivity multiplied by its risk weight, the size of a stressed ten-day move in that risk factor.
Aggregate average notional amount (AANA): Aggregate average notional amount of non-centrally cleared derivatives, measured at group level, which decides when a firm comes into scope of the initial margin rules.
Initial margin threshold: Up to €50m of initial margin, at group level across all the trades between two groups, need not be collected.
Segregation: Holding initial margin apart from the collecting party's own assets, typically with a third-party custodian, so that it is protected if the collector fails.
Independent amount: An independent amount: initial margin agreed bilaterally in a CSA as a fixed sum, independent of the trades' sensitivities.

Deep Dives & Origins

Deep Dives

J. Gregory, The xVA Challenge: Counterparty Risk, Funding, Collateral, Capital and Initial Margin, 4th ed., Wiley, 2020, chapters 7, “Margin (Collateral) and Settlement”, and 9, “Initial Margin Methodologies”. Intermediate.
ISDA, ISDA SIMM Methodology, version 2.7, the risk weights, correlations and aggregation formulas. Advanced.

Origins

Basel Committee on Banking Supervision and IOSCO, Margin requirements for non-centrally cleared derivatives, BIS, April 2020.
Basel Committee on Banking Supervision and IOSCO, press release on the deferral of the final implementation phases of the margin requirements, 3 April 2020.
ISDA, ISDA SIMM Methodology, version 2.7, effective 7 December 2024.
ISDA, Margin Survey Year-End 2025, press release, April 2026.
Paul, Weiss, Rifkind, Wharton & Garrison LLP, Credit Suisse Group Special Committee of the Board of Directors: Report on Archegos Capital Management, 29 July 2021; Risk.net, “Archegos report details margin failings at Credit Suisse”, 2021.

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