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Working Paper
Portfolio Margining Using PCA Latent Factors
Filtered historical simulation (FHS)—a simple method of calculating Value-at-Risk that reacts quickly to changes in market volatility—is a popular method for calculating margin at central counterparties. However, FHS does not address how correlation can vary through time. Typically, in margin systems, each risk factor is filtered individually so that the computational burden increases linearly as the number of risk factors grows. We propose an alternative method that filters historical returns using latent risk factors derived from principal component analysis. We compare this method's ...
Newsletter
How Have Capital Levels of Futures Commission Merchants Changed Since the Global Financial Crisis?
Following the Global Financial Crisis of 2007–09 (GFC), regulators across the world enacted regulations to repair and strengthen financial markets. These regulations included a mandate to have more financial market contracts be cleared through central counterparties (CCPs), which are financial institutions that guarantee the performance of contracts.1 As a result, the central clearing of derivatives transactions increased significantly, and so did the allocation of capital to support this activity in line with regulatory requirements. If demand to centrally clear transactions continues to ...