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freddiemac
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Posts: 557
Joined: July 17th, 2006, 8:29 am

BCBS SA-CCR margined vs unmargined add-ons

October 22nd, 2018, 9:29 am

The BCBS SA-CCRresults in different add-ons for trades that have the same “margin period of risk” but where one is an unmargined trade with a maturity of 10 days while the other one is daily margined ie it has a 10 day margin period of risk.
The SA-CCR floors the maturity for unmargined derivatives to minimum 10 days and also floors the margin period of risk for margined derivatives to 10 days. Hence, both derivatives should have the same the expected exposure.

However, this is not the case as a margined derivative has a maturity factor that is 3/2 times higher. I have tried to understand from where this 3/2 comes from also by looking into “Foundations of the standardised approach for measuring counterparty credit risk exposures” where it first appears in equation 12.
Any insights into why this factor is applied to margined as opposed to unmargined trades would be most appreciated.
 
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bearish
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Joined: February 3rd, 2011, 2:19 pm

Re: BCBS SA-CCR margined vs unmargined add-ons

October 22nd, 2018, 12:25 pm

2/3 is the integral of sqrt(t) from 0 to 1.
 
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freddiemac
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Posts: 557
Joined: July 17th, 2006, 8:29 am

Re: BCBS SA-CCR margined vs unmargined add-ons

October 22nd, 2018, 1:32 pm

Thanks a lot Bearish! I see that in equation (12) it is the intergral as you helpfully pointed out.
However, if you compare the equations for unmargined (15) vs margined (19) transaction add-ons they both have this term so this cancels out when comparing the two. But equation (20) has the term 3/2 in front of the maturity factor which constitutes the sole difference between unmargined and margined trades; “Thus, the entire difference between margined and unmargined trade-level add-ons resides in the maturity factors.”
But there is no apparent explanation for the 3/2 in equation (20).
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