Portfolio Margining for Rates: Saving on Clearing

The countdown has officially started toward the mandatory clearing of a significant portion of Over-the-Counter (OTC) interest rate swaps. As of August 2012, there was $514 trillion of notional outstanding in these products, which if cleared would require $7.1 trillion in gross initial margin. Margin offsets, primarily through OTC swaps and futures contracts, dramatically reduce margin requirements. TABB estimates initial margin requirements for IR swaps will be lowered by at least 32% when portfolio margining becomes available to all market participants. 

The idea behind portfolio margining is that the margin requirement for a portfolio with multiple positions with related instruments should be lower than it is for the individual instruments in isolation. Simply put, portfolio margining allows firms with offsetting risks to also offset their margin. For example, given a calendar or credit spread where the firm has taken both a long and a short position on two similar but different products, the long position’s margin can be used to offset the margin on the short side. TABB Group estimates that margin offsets from portfolio margining can potentially reduce the amount of margin needed by at least 50%.