The context of this question is Counterparty Credit Risk. In particular, the modelling of collateral for non-cleared OTC derivatives.

Regulators require collateral amounts, such as Variation Margin and Initial Margin, to be exchanged with a counterparty throughout the lifetime of a portfolio of trades.

This collateral should mitigate the risk of a counterparties' default over some horizon, e.g. 10 working days, called the margin period of risk (MPOR).

The settlement period is part of that MPOR, and corresponds to the time during which cash flows are acummulated by either side. This period ends when a default event is recognized, after which the liquidation procedure starts.

The question is, do you know of any available work on how to quantitatively determine this settlement period over counterparties?

So far we have approached this using Granger causality test. In short, we check whether the actual available collateral per counterparty is Granger-caused by the theoretical collateral. Then we use the average time-lag over counterparties, resulting from this test, as an estimation of the settlement period.

Kind Regards,



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