A guaranteed deterministic approach to margining on exchange-traded derivatives market: Numerical experiment

The article discusses a modern approach to risk management of the central counterparty,primarily the issue of the sufficiency of its financial resources, including the provision of clearingmembers, the capital of the central counterparty and the mutual liability fund. The main subject is the margining system, responsible for an adequate level of collateral for clearing members, that plays critical role in risk management, being the vanguard in protecting against losses associated with default by clearing members and the most sensitive to market risk part of the central counterparty’s skin of the game. A system of margining a portfolio of options and futures in the derivatives market is described, with default management based on the methodology proposed by a number of inventors, registered in 2004. For this system, a mathematical model of margining (i.e. determining the required level of the collateral) is built, based on the ideology of a guaranteed deterministic approach to superhedging: Bellman–Isaacs equations are derived from the economic meaning of the problem. A form of these equations, convenient for calculations, is obtained. Lipschitz constants for the solutions of Bellman–Isaacs equations are estimated. A computational framework for efficient numerical solution of these equations is created. Numerical experiments are carried out on some model examples to demonstrate the efficiency of the system. These experiments also show practical implications of marginsubadditivity — a crucial property of the mathematical model.

Keywords

central counterparty, portfolio margining, option, futures, Bellman–Isaacs equations, Lipschitz constants, numerical experiment, simulation modeling

Acknowledgment

This study was supported by the Russian Foundation for Basic Research (project 19-01-00613 а).

Received

16.11.2021

Publication date

13.12.2021

Number of characters

31050

Cite

GOST	Smirnov S., Kuznetsov V., Slivinski V. A guaranteed deterministic approach to margining on exchange-traded derivatives market: Numerical experiment // Ekonomika i matematicheskie metody – 2021. – V. 57. – Issue 4 C. 76-87 [Electronic resource]. URL: https://emm.jes.su/S042473880017501-0-1 (circulation date: 02.05.2024). DOI: 10.31857/S042473880017501-0
MLA	Smirnov, Sergey, Kuznetsov, Vladislav, Slivinski, Vadim "A guaranteed deterministic approach to margining on exchange-traded derivatives market: Numerical experiment." Ekonomika i matematicheskie metody 57.4 (2021):76-87. DOI: 10.31857/S042473880017501-0
APA	Smirnov S., Kuznetsov V., Slivinski V. (2021). A guaranteed deterministic approach to margining on exchange-traded derivatives market: Numerical experiment. Ekonomika i matematicheskie metody 57(4), pp.76-87 DOI: 10.31857/S042473880017501-0

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