Swaps Clearing and Collateral

Swaps Margin – Uncleared Swaps

To calculate margin on an interest rate swap you need two pieces of information:

The % of notional amount required to be posted as collateral (appendix A)
Based on what asset and maturity you choose to post, the prop haircut required for that asset (Appendix B)

Appendix A – Standardized Initial Margin Schedule

Source: BIS Non-Centrally cleared derivatives 2013, Initial Margin Requirement, % of notional exposure)

Appendix B. Standardized Haircut Schedule

Source: BIS Summary of changes to implementation of the margin requirements for non-centrally cleared derivatives

Initial Margin – Interest Rate Swap

EXAMPLE SWAP: Economic Terms
Notional Amount	$100 million
Maturity	4 years
Fixed Leg	Paid Semi-Annual
Floating Leg	Received Quarterly (RESET RATE = 3 Month LIBOR)

Margin (% of notional)	2% of notional amount (see appendix A)
Collateral Posted	1 year US treasury
Haircut (1yr. Treasury)	2% (see Appendix B)

N.B. Haircut minimizes administrative expense of sending collateral back and forth by taking into account the volatility and credit quality of the collateral asset. In order to meet this initial margin call this counterparty will post $2,041,000 U.S. Treasuries maturing In one year.

Variation Margin – Interest Rate Swap

EXAMPLE SWAP: Economic Terms
Notional Amount	$100 million
Maturity	4 years
Fixed Leg	Paid Semi-Annual
Floating Leg	Received Quarterly (RESET RATE = 3 Month LIBOR)

Margin (% of notional)	2% of notional amount (see appendix A)
Collateral Posted	1 year US treasury
Haircut (1yr. Treasury)	2% (see Appendix B)
INITIAL MARGIN	$2,041,000 U.S. Treasuries maturing In one year

The following day, the 4 year swap rate goes up 10 bps
This counterparty makes 10 bps = Variation Margin = $33,500
THE CLEARINGHOUSE (OR COUNTERPARTY) WILL TRANSFER $34,170 IN VARIATION MARGIN
$33,500 Adjusted for haircut of 2% (presumes counterparty posts 1 year US treasury note)