CCP Margin Models

How a clearing house sizes its margin

A central counterparty’s first line of defence is the initial margin it collects from every clearing member, and the model that sizes it is the CCP’s most important risk decision. Most clearing houses use a historical or filtered historical value-at-risk or expected shortfall model over a short margin period of risk, then add buffers for liquidity, concentration and procyclicality. Get it too low and the default fund pays; too high and clearing becomes uneconomic — and either way the model’s behaviour in a crisis can drain liquidity from the whole market.

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What the lesson covers

1. What it is
2. How it works
3. Why it’s used
4. Procyclicality
5. Risks to watch

Key terms

• Margin period of risk — The assumed time from a member’s last good margin payment to the close-out of its portfolio.
• Historical simulation — Revaluing the portfolio under past risk-factor moves and taking a tail measure of the losses.
• Filtered historical simulation — Historical simulation with past moves rescaled to current volatility.
• Anti-procyclicality buffer — Extra margin, at least 25% under one EMIR option, collected in calm markets and released in stress.
• Liquidity add-on — An extra charge for positions too large to be closed out at prevailing market prices.
• Default fund — The mutualised resource, contributed by all members, used after the defaulter’s own margin and contribution.

Every key term, A to Z

In practice

Clearing members and their clients receive daily margin reports from each CCP, and many replicate the CCP’s model to forecast calls and price trades. CCPs publish quantitative disclosures on margin coverage, backtesting breaches and stress test results each quarter.

Read next

• Central Clearing — A central counterparty steps into every trade
• Value at Risk — One number for tomorrow’s loss, and what it leaves out
• The Uncleared Margin Rules — Who must post initial margin, and when

In the app, CCP Margin Models carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.