Initial margin risk generator gets significant enhancement

In today’s competitive and fast-paced financial landscape, efficiency and accuracy in risk management are crucial. As part of LSEG’s commitment to innovation in risk management, Post Trade Solutions has significantly enhanced its Initial Margin Risk Generator by integrating Algorithmic Differentiation (AD) to accelerate ISDA SIMM™ calculations.

The update, available for industry use via Open Source Risk Engine, addresses the inefficiencies of traditional bump-and-revalue methods, especially for complex derivatives like KIKO and Basket Swaps.

By using AD, firms can compute sensitivities much faster and more accurately, reducing runtime by up to 95%. 

ISDA Standard Initial Margin Model (SIMM™) calculations (and the underlying delta and vega sensitivity inputs) can be a lengthy and resource-intensive step in the processes around derivatives margin reconciliation and related exchange workflows. 

This is particularly true for financial institutions dealing with larger portfolios containing, complex products such as Best-of/Worst-of Basket Swaps, Knock-in/Knock-out (KIKO) Variance Swaps and Corridor Variance Swaps. 

Calculating the thousands of underlying trade sensitivities for these products can take several hours if run in a conventional bump and revaluation approach, which can create operational bottlenecks and challenges when re-runs are needed to incorporate new trades or fix errors. 

Our enhancement addresses this long-standing challenge by leveraging Algorithmic Differentiation – a mathematical solution for calculating derivatives for efficient use of the chain rule – significantly reducing computational run-time and making the sensitivity calculations much faster and more scalable for complex portfolios.

Algorithmic Differentiation (AD) provides a cost-effective alternative to expensive hardware such as graphics processing units (GPUs) and/or multiple central processing units (CPU) or cloud-based calculation cores, which can be costly and quickly become outdated. 

It also maintains accuracy while improving speed and operational efficiency, unlike many other software-based “short-cuts” or approximations. 

Post Trade Solutions can leverage AD through its innovative Scripted Trade framework, which allows clients to evaluate complex derivative payoffs under a common scripting language, and value the trade within a Monte Carlo simulation framework. 

The framework can be parameterised under a multivariate Black Scholes or Gaussian process and contains support for additional high-performance computing enhancements beyond AD – such as parallelisation.

Since the required trade sensitivities for ISDA SIMM™ are partial derivatives of the price with respect to each underlying risk factor, AD exploits simple arithmetic functions that have known analytical derivatives to calculate sensitivities more quickly than the alternative “bump and revalue” approach. “Bump and revalue” requires one additional pricing step for every underlying risk factor, which can number into the thousands for even just one complex derivative. 

The benefits of Post Trade Solution’s implementation are already being realised. The first client to implement the update experienced a 90-95% reduction in runtime, bringing calculations down from over two hours to mere minutes.

By offering the combination of speed and accuracy, this transformation empowers firms to reallocate their time and valuable resources to other areas where they’re needed most. 

As the derivatives industry evolves, LSEG remains focused on delivering smarter, faster, and more innovative tools to help our clients navigate complexity and optimise performance.