A Margin Calculation Method For Illiquid Products

Abstract

The role of the central counterparties (CCPs) on the market is to take over the counterparty risk during the trading on stock exchanges. CCPs use a multilevel guarantee system to manage this risk. The margin has a key role in this guarantee system, and the paper will focus only on this level. The main motivation of this paper is to introduce a potential margin calculation method which is compliant with the EMIR regulation and also does not put unnecessary burden on the market participants. We will introduce this method for two special type of products: (1) the illiquid products and (2) for the case of initial public offerings (IPOs). The specialty of these two product types, that there is no available historical time series of the securities' prices, so no risk management models can be used by the CCPs to calculate the margin.