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Derivatives Collateral Estimation Tool

 Behind this welcoming note is our Derivatives Collateral Estimation Tool (“Tool”). It is country and currency agnostic. The initial input values in the tool are for illustrative purposes only.

1. We are specifically requesting assistance to improve the Tool in two specific areas:

    a. Mathematics of CCP Fragmentation

The current version of the Tool assumes that there is one CCP for each asset class. It would seem intuitive that the total amount of collateral required would increase if there were multiple CCPs per asset class. Unfortunately, little quantitative research seems to have been done in this particular area. Should you know of any scholarly work done in the mathematics of fragmentation, please alert us to such research at our email address,  financialmarketsgroup@chi.frb.org.

    b. Volatility and Mark to Model

The current version of the Tool interposes an asset class specific margin factor between the estimated notional principal and the observed volatility of that asset class, by period. Intuitively, one cannot simply multiply the estimated notional principal by the observed volatility that asset class to estimate the mark to model component of the collateral required for uncleared swaps. There must be a mathematical function (which could be a table look up or a formula specific to each asset class) that better estimates the mark to model collateral requirement. Some Collateral Practitioners have noted that there is a high correlation between the mark to model amount of collateral and the VIX Index, which also seems to be asset class agnostic. Any suggestions for improvement and refinement in this area are specifically encouraged.

2. Comments and Suggestions

We welcome all constructive comments and suggestions on how the Tool could be improved. The shelf life of the Tool will likely be highly correlated to the amount of time that financial reform initiatives will take in various regulatory jurisdictions. As this subject area is currently the subject of considerable international interest, it behooves us to fine tune the Tool sooner rather than later.

3. Thank You

We would like to thank all of the Collateral Practitioners, and the staffs of the derivatives CCPs that have helped us to date for sharing their expertise and to the national authorities, interested parties and Central Banks for their patience.

4. Registration

Please leave your email address with us. At the moment, we are favorably disposed towards refining the Tool and providing a subsequent (and likely final) version. If you register your email address, we will make a reasonable effort to notify you (at that email address) when the subsequent version of the Tool is available. Should you elect not to do so, we will not know to contact you, let alone, how.

Email Address:

Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413, USA. Tel. (312) 322-5322

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