SwapClear Margin Methodology

Initial margin is collected from each member to cover potential losses in the event of a default under prevailing market conditions over a specified holding period and at a specified confidence level.  SwapClear initial margin is calculated on the basis of a five-day holding period and is the aggregate worst case loss across all currencies over the historical period, using LCH.Clearnet’s proprietary PAIRS (Portfolio Approach to Interest Rate Scenarios) margin methodology.  PAIRS is a value-at-risk model based on filtered historical simulation incorporating modified volatility scaling. The model uses five years (1250 days) of historical market data to simulate changes in portfolio value from which an estimate of potential loss is calculated. Portfolio positions are fully revalued in each scenario. PAIRS addresses the effects of volatility clustering in interest rate markets by implementing a modified volatility scaling methodology, whereby historical scenarios are explicitly scaled to reflect prevailing market conditions. Volatility scaling is applied based on an Exponentially Weighted Moving Average (EWMA) model with a decay factor of 0.97.

In addition to PAIRS initial margin, SwapClear applies margin add-ons covering Credit Risk, Liquidity Risk and Sovereign Risk where a particular member’s inherent risk exposure is not captured within the PAIRS model. 

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