When a counterparty defaults, a derivatives portfolio cannot always be replaced or closed immediately. Its value can move during that period. Initial margin provides a separate buffer for this possible future movement, while variation margin addresses the exposure already reflected in current market values. ISDA’s Standard Initial Margin Model, usually called SIMM, estimates initial margin from a portfolio’s risk sensitivities.

The module follows the calculation from signed sensitivities through permitted netting, risk weights, concentration adjustments and aggregation. It distinguishes product classes from risk classes, then examines the six risk classes individually. The optionality lessons explain why vega and curvature need additional treatment and why SIMM curvature is derived from volatility risk and expiry rather than a raw gamma input.

The later lessons connect the model result to hedging decisions, additional margin, collateral transfers, two-way posting and funding. You will also examine risk-data exchange, reconciliation, backtesting and calibration changes. These practical steps explain why two firms can disagree about a number even when they appear to use the same model.

Start with the distinction between initial and variation margin, and keep track of signs and units as you progress. The path references the identified ISDA methodology release. Reduced portfolios and adjustable teaching parameters are labelled, and selected prescribed values are identified separately. The applets explain the calculation but do not constitute a complete calibrated SIMM implementation.

Continue your learning: Risk sensitivities · SA-CCR counterparty exposure · XVA valuation adjustments

Look up a term as you work through the examples. Definitions explain the terminology; the source references and assumptions beside each lesson explain the scope of its calculation.

86 definitions

Actual, hypothetical and risk-theoretical P&L

P&L means profit and loss. Actual P&L follows the applicable realised desk calculation; hypothetical P&L revalues a specified static portfolio; risk-theoretical P&L uses the risk factors represented by the model. Their definitions and exclusions must be matched before comparing them.

Asset

An asset is a resource or contractual right with economic value. For a bank, examples include cash, securities and loans that customers are expected to repay.

At the money

An option is at the money when its strike is close to the relevant underlying price or forward price under the stated convention. Moneyness describes that relationship more generally.

Backtesting

Backtesting compares model outputs with subsequent or historical outcomes under a defined testing convention. A breach or exceedance occurs when the observed loss is beyond the relevant model threshold; count, size and data dependence all affect interpretation.

Base correlation and BC01

Base correlation is a risk input associated with the credit-index tranche valuation framework described by the method. BC01 measures sensitivity to a one-percentage-point base-correlation change and is separate from the correlation used to aggregate ordinary credit-spread sensitivities.

Basel, BCBS and IOSCO

The Basel Committee on Banking Supervision develops international prudential standards for banks. IOSCO is the International Organization of Securities Commissions. International standards require the relevant jurisdictional implementation before they can be treated as local rules.

Basis point

One basis point is one hundredth of a percentage point. A rise from 4.00% to 4.01% is a one-basis-point increase.

Basis risk

Basis risk arises when two related prices or rates do not move together as assumed. A hedge tied to one benchmark may therefore leave exposure to a different benchmark, location or contract specification.

Bond

A bond is a debt security under which an issuer promises specified payments to investors. Its value depends on the timing of those payments, discount rates and the risk of non-payment.

Calibration

Calibration selects model parameters to match chosen data, market prices or target risk properties. A calibrated model can still be inappropriate if its structure or the selected evidence does not suit the task.

Carry and opportunity cost

Carry is the ongoing income or expense from holding and financing a position. Opportunity cost compares that choice with a specified alternative, whose credit, capital and liquidity risks may differ.

Collateral

Collateral is cash or another eligible asset provided to secure an obligation. Its protection depends on value, legal enforceability, availability and the time required to realise it.

Concentration

Concentration means that a large share of exposure or funding depends on a small number of sources or common drivers. The Herfindahl–Hirschman Index, or HHI, sums squared shares to measure size concentration but does not by itself measure behavioural dependence.

Correlation

Correlation summarises a specified relationship between two variables. A linear correlation does not fully describe joint tail behaviour, and a prescribed regulatory correlation is a model parameter rather than a measured relationship for every portfolio.

Counterparty credit risk

Counterparty credit risk is the risk of loss when the other party to a financial contract fails to perform. For derivatives, exposure can change with market conditions and may be positive for either party at different times.

Covariance

Covariance measures how two variables move together in their original units. A covariance matrix combines variances and pairwise covariances and is often used to aggregate sensitivities or model portfolio risk.

Credit spread

A credit spread is the additional yield or premium associated with credit exposure relative to a reference rate. It can reflect default risk, liquidity and other market effects, so it is not a direct default probability.

Credit-spread risk

Credit-spread risk is the risk of value changes caused by movements in credit spreads. FRTB distinguishes non-securitisation, securitisation outside the alternative correlation trading portfolio and alternative correlation trading portfolio treatments.

CRIF

The Common Risk Interchange Format standardises exchanged risk records. Consistent formatting helps reconciliation, but it does not establish that trade populations, pricing, units or risk-factor mappings are correct.

Currency codes

GBP denotes pounds sterling, USD denotes US dollars, EUR denotes euros and JPY denotes Japanese yen. Currency labels matter because values and thresholds must be converted consistently before they are compared or combined.

Curvature

Curvature describes the part of a value change that a first-order sensitivity does not capture. Its regulatory construction differs by framework: FRTB uses specified repricing shocks, whereas SIMM derives a curvature exposure from volatility-weighted vega and expiry scaling.

Delta

Delta is the first-order sensitivity of value to a specified underlying input. A delta hedge offsets that local exposure at the current point but may need adjustment when the market moves.

Deposit beta and lag

Deposit beta measures the proportion of a market-rate change passed into the customer deposit rate. Lag measures the delay before that repricing occurs; neither is a deposit withdrawal rate.

Discount rate

A discount rate is a rate used to value future cash flows in present terms. The appropriate rate depends on the valuation framework and the characteristics of the cash flow.

Diversification

Diversification is the reduction in aggregate risk that can arise when positions do not experience adverse outcomes together. Its benefit depends on the chosen risk measure, dependence assumptions and any regulatory aggregation rules.

Equity

Equity represents an ownership interest. On a bank balance sheet, equity is the residual interest in assets after liabilities; in a market-risk example, an equity position usually means shares in a company.

Expectation

Expectation is an average weighted by the probabilities in a model. Conditional expectation updates that average using specified information and considers only the outcomes consistent with it.

Expiry

Expiry is the time at which an option’s exercise right ends. A European option can be exercised only at expiry, while other exercise styles allow different choices.

Finite difference

A finite difference estimates a sensitivity by repricing after a small change in an input. The bump size, direction and units determine how the observed price change is converted into a sensitivity.

Floating rate

A floating rate resets according to a benchmark or contractual rule. Repricing occurs when the rate used to calculate a payment is updated, which need not coincide with repayment of principal.

Funding and rollover risk

Funding supports assets and payment obligations through deposits, borrowing and other sources. Rollover risk is the risk that maturing funding cannot be replaced at an acceptable cost or at all.

FX swap and forward points

An FX swap exchanges currencies now and reverses the exchange at a later date. Forward points express the difference between forward and spot exchange rates; basis and market conventions affect the all-in funding interpretation.

Gamma

Gamma measures how delta changes as the underlying changes. Convexity describes curvature more generally; bond convexity usually refers to the second-order relationship between price and yield.

Haircut

A haircut reduces the recognised value of collateral or an asset pool for a specified calculation. It accounts for the relevant risk or rule and is not necessarily the price discount obtained in an actual sale.

Hedge

A hedge is a position intended to offset part of another exposure. It can leave basis, timing, legal or non-linear risks and can introduce its own funding and counterparty demands.

Incremental and standalone risk

Standalone risk measures a position by itself. Incremental risk is the change in portfolio risk when the position is added; it can be negative when the new position hedges an existing exposure.

Independence

Variables are independent when learning the value of one does not change the probability distribution of the other. This is stronger than having zero linear correlation.

Index decomposition

Index decomposition represents a position through exposures to its constituents when the relevant framework permits or requires it. Delta, vega and curvature can have different index treatments, so look-through should not be applied indiscriminately.

Initial margin

Initial margin is a buffer for potential adverse value movements during the period needed to close or replace positions after default. It is separate from variation margin and can create a funding requirement for the posting party.

Interest-rate swap

An interest-rate swap exchanges interest payments calculated on a reference notional. A common swap exchanges fixed interest for floating interest, allowing the parties to change their exposure to future rates.

Interpolation

Interpolation supplies values between known curve points. Linear interpolation in rates and linear interpolation in logarithms of discount factors need not produce the same intermediate prices or sensitivities.

Investment grade and high yield

Investment grade and high yield are credit-quality groupings based on the relevant rating or classification rules. Rating labels such as AA and BBB indicate categories, not guarantees of repayment.

Liquidity and solvency

Liquidity concerns the ability to meet obligations when due. Solvency concerns the ability of assets and loss-absorbing resources to cover liabilities and losses; a solvent institution can still face a timed cash shortage.

Liquidity horizon

A liquidity horizon is the period used to represent how long risk may take to hedge or close under the applicable framework. FRTB liquidity-horizon adjustments are not interchangeable with an arbitrary scaling of a portfolio VaR.

Maturity

Maturity is the date or remaining period until a contract ends or principal becomes due. It can differ from an instrument’s next interest-rate reset or an option’s expiry.

Model risk

Model risk is the risk of adverse decisions caused by an inappropriate model, incorrect implementation, unreliable inputs or misuse of results. Validation should examine assumptions and limitations as well as numerical correctness.

MVA

Margin valuation adjustment represents the value of funding initial margin over the relevant future life of a portfolio. It depends on projected margin and funding assumptions, not just the initial margin balance today.

Netting set

A netting set contains transactions that can be combined under the relevant legally recognised agreement and calculation rules. Economic offsets across different legal sets do not automatically qualify as regulatory or collateral offsets.

Normal and lognormal models

A normal model describes additive movements in a variable, while a lognormal model describes a positive variable whose logarithm is normally distributed. Their volatility inputs use different conventions and cannot be interchanged without conversion.

Notional

Notional is the reference amount used to scale a financial contract’s payments or exposure measures. It is not generally the contract’s market value or the amount that would be lost on default.

OIS

An overnight indexed swap exchanges a fixed rate for a payment linked to compounded overnight rates. OIS curves are often relevant to collateralised discounting under the applicable currency and collateral conventions.

Option

An option gives its holder a contractual choice, such as buying or selling an asset on specified terms. Optionality also occurs inside other products, for example when a borrower can repay early.

Poisson process

A Poisson process counts randomly timed events with a specified intensity under its assumptions. Adding jumps allows a model to represent discontinuous changes that a purely continuous diffusion cannot generate.

Portfolio

A portfolio is a collection of positions considered together. Its risk depends on their sizes, relationships and permitted offsets, not just the sum of their standalone risks.

Reconciliation

Reconciliation compares records or results and traces differences to their source. For risk calculations, this includes trade population, valuation time, units, currency, mapping, assumptions and model version.

Regridding

Regridding expresses risk calculated on one set of tenors or factors on another required grid. Preserving a numerical sum is useful but does not alone prove that the transformed risk reproduces the intended valuation behaviour.

Remediation and add-ons

Remediation addresses a model or control deficiency through documented actions. An add-on is an additional required amount under the relevant method or agreement; its basis and governance should remain separate from unexplained changes to raw sensitivities.

Risk class and bucket

A risk class groups related risk types, such as interest rates or equities. A bucket is a further prescribed grouping used in aggregation. The definitions differ across FRTB, SA-CVA and SIMM.

Risk factor

A risk factor is a market or credit quantity whose movement affects a position’s value or loss. Examples include an interest rate, an exchange rate, a credit spread and an implied volatility.

Risk weight and weighted sensitivity

A risk weight scales a relevant exposure or sensitivity according to the framework. A weighted sensitivity retains the required sign and is then combined with other weighted sensitivities under the applicable aggregation rules.

Securitisation and tranche

A securitisation allocates cash flows and credit losses from a pool of exposures to securities or positions. A tranche has a specified priority and loss-absorption range, so its risk can differ substantially from the average risk of the pool.

Segregation

Segregation separates collateral or assets under specified legal arrangements. Bankruptcy-remoteness and permitted reuse depend on the actual structure, so received initial margin cannot automatically be assumed available to fund posted margin.

Seniority

Seniority describes a claim’s priority relative to other claims on an issuer. It affects recovery and can determine whether positions are permitted to offset in a default-risk calculation.

Sensitivity

A sensitivity measures how a value changes when a specified input changes, under a stated bump and unit convention. Greeks are familiar option sensitivities such as delta, gamma and vega.

Settlement

Settlement is the completion of a payment or delivery obligation. A settlement lag separates the trade date from completion and can create cash needs and exposure before the exchange is final.

SF in SIMM curvature

In a SIMM curvature calculation, the scaling factor converts volatility exposure into the prescribed curvature exposure using the applicable maturity convention. It is distinct from the supervisory factor used in SA-CCR.

SIMM and ISDA

The Standard Initial Margin Model is ISDA’s sensitivity-based model for initial margin on the relevant derivatives portfolios. ISDA is the International Swaps and Derivatives Association, which publishes the identified methodology and related standards.

SIMM bucket K and directional S

In SIMM aggregation, K measures a bucket’s risk magnitude. S carries the signed sum into the next aggregation layer after applying the prescribed bounds. They have different roles and should not be substituted for one another.

SIMM concentration factor

SIMM’s concentration factors increase the treatment of sufficiently large risk positions under the prescribed grouping and thresholds. CR refers to the relevant delta factor and VCR to the vega factor in the applets; their aggregation groups are not identical across risk classes.

SIMM product classes

SIMM assigns trades to product classes and calculates their margin separately before adding the class totals. A product class can contain several risk classes; RatesFX is the combined rates and foreign-exchange product class.

SIMM theta and lambda

In the SIMM curvature lesson, theta summarises the relevant signed curvature exposure and lambda is the resulting tail multiplier. These symbols have different meanings in other pricing or probability models, so their local formula definitions govern.

Spot price

The spot price is the price or exchange rate for a transaction with the usual near-term settlement convention. It differs from a forward price agreed for a later transaction.

Standard deviation

Variance is the probability-weighted squared deviation from a mean. Standard deviation is its square root and is expressed in the original units of the variable.

Stress calibration

Stress calibration uses a defined adverse market period or scenario to set a model’s risk scale. The data window, factor set and aggregation method determine what the resulting stressed measure represents.

Tenor

A tenor is a specified period, such as three months or five years. A curve vertex is a selected maturity point at which a rate or sensitivity is represented.

Threshold and MTA

A threshold defines an amount that may remain unsecured or uncollateralised under the applicable arrangement. A minimum transfer amount limits small collateral transfers. Their legal scope and treatment differ across regulatory and contractual contexts.

Training, validation and test samples

Training data are used to fit a model, while validation and test data assess choices or performance outside that fitting process. An out-of-time sample helps test whether performance survives a change in observation period.

Underlying

The underlying is the asset, rate, index or other reference quantity on which a derivative’s payments depend. A derivative can depend on more than one underlying risk factor.

Variation margin

Variation margin addresses changes in current exposure by transferring collateral according to the agreement. A received or posted amount is a cash or collateral flow, not an additional valuation profit by itself.

Vega

Vega measures how value changes with the volatility input of a pricing model. A vega quoted per one volatility percentage point differs by a factor of 100 from a derivative taken with respect to volatility expressed as a decimal.

Vega exposure, VRW and HVR

SIMM transforms vega into the specified volatility-risk exposure before applying a vega risk weight and applicable concentration factor. VRW is the vega risk weight, while HVR is the historical volatility ratio used in the specified risk-class treatment.

Volatility

Volatility measures the variability of a price, return or other risk factor over a stated period. It describes dispersion, not the direction in which the next move will occur.

XVA

XVA is a collective label for valuation adjustments addressing credit, funding, collateral, capital and related effects. The adjustments must be combined consistently within a valuation framework to avoid double counting.

Yield

Yield is a rate of return implied by a price and a specified set of cash flows under a stated convention. Different yield definitions and compounding conventions can produce different numerical rates.

Yield

A yield is a rate of return implied by a price and a specified cash-flow convention. Yield to maturity is the single discount rate that equates a bond’s promised payments to its price; realised returns can differ.

Yield curve

A yield curve or term structure describes how rates or discount factors vary with maturity. Projection curves and discount curves can serve different purposes within one valuation.