Margin call freqency vs MtM frequency

[afterworkguinness]

I'm a bit confused with how margin calls typically work in OTC agreements governed by ISA Credit Support Annexes.

We have a exposure threshold below which no collateral need be posted. We have a minimum transfer amount, such that when the exposure is >= threshold + minimum transfer amount, collateral will be posted.

Where I get confused is with margin call frequencies. Is this stating the frequency at which the deal is mark-to-marketed or is it separate from that and as the deal is MtM'd, the need to post collateral is assessed?

Or can the two be done at different frequencies where as the deal is MTM'd (eg daily) the required collateral is aggregated and then on the next date collateral can be called, it is called if the aggregated amount is >= threshold + minimum transfer amount ?

 

[David Harper CFA FRM]

Hi @afterworkguinness

While I can't speak to the typical arrangement, my understanding per the assigned Gregory is that valuation frequency and margin call often coincide with a daily frequency (or even intraday frequency) but are distinct such that the margin call frequency occurs less often in order to reduce operational workload. In order to conduct a margin call, you would need a valuation, so the valuation must be at least as frequent as the margin call (it seems to me!). But margin calls are generally "lumpier" than the valutions. It is not only margin call frequency that is informed by operational workload but also the threshold and the minimum transfer amount (MTA). In Gregory, valuation (MtM) seems like something that can approach near continuous frequency and might be limited only by input data; but collateral transfers invoke operational workload and are therefore lumpy, where reducing workload would be achieved by reducing margin call frequency, increasing threshold and increasing MTA. Here is Gregory:

5.2.5 Margin Call Frequency Margin call frequency refers to the periodic timescale with which collateral may be called and returned. A longer margin call frequency may be agreed upon, most probably to reduce operational workload and in order for the relevant valuations to be carried out. Some smaller institutions may struggle with the operational and funding requirements in relation to the daily margin calls required by larger counterparties. Whilst a margin call frequency longer than daily might be practical for asset classes and markets that are not so volatile, daily margining is becoming standard in OTC derivatives markets. Furthermore, intraday margining is common for vanilla products such as repos and for derivatives cleared via central counterparties (Chapter 7)." -- Gregory, Jon (2012-09-07). Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets (The Wiley Finance Series) (Kindle Locations 2143-2149). John Wiley and Sons. Kindle Edition.

 

[afterworkguinness]

As always, thanks for the very detailed reply.