BCBS 261 sets specific rules regarding to the initial margin calculation for bilateral trade (https://www.bis.org/publ/bcbs261.pdf)

In page 21, the standardized rule sets the methodology for the same which is basically

Net Margin = (0.40 + 0.60 * NGR) * Gross Margin

Where NGR is the ratio of Net to gross Market value of the underlying trades in the portfolio.

I could not understand the logic of the formula (0.40 + 0.60 * NGR). I understand that the ratio for net to gross margin is assumed as a function of 60% of the ratio for net to gross market value due to consideration of future exposure. So that signifies 0.60 in above formula. However what is the significance of 0.40?



Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Browse other questions tagged or ask your own question.