Margining requirements for FI Repo

[hsuffyan]

Hi David,

I don't think this is covered in the FRM, but I am sure it draws upon the models and techniques taught within the course. I was wondering what would be a suitable method to calculate a good level of overnight margin for a Fixed Income repo, such that any fallout from a CP default is mitigated within a reasonable level of margin.

My approach would be to calculate a 1day VaR for the repo portfolio, which would take into consideration large overnight moves upto 99% confidence intervals. For the remaining tail, I would stress this VaR by looking at the credit quality of the portfolio and how it would behave in a "disturbed" market when there is a flight to quality going on.

 

[waqas.munir]

Interesting approach. Yes not covered in the course but still very relavant. I agree with the var approach of calculating margin. However, liquidity in the market also has a role to play i.e. lower(higher) liquidity should lead to a higher (lower) margin. May be we can calculate LVaR to account for this?

Input from anyone working in the treasury division would v helpful.