Module 17 · Advanced
Initial margin & ISDA SIMM
After 2008, regulators required the two sides of an uncollateralized derivative to each post initial margin — a safety buffer held aside in case one defaults. To keep everyone computing the same number, the industry adopted one standard model: the ISDA SIMM (Standard Initial Margin Model).
SIMM works on your risk sensitivities — how much you make or lose per basis point at each tenor. It multiplies each by a regulatory risk weight, then aggregates them through a correlation matrix. The magic is in that aggregation: a long and a short partly cancel, so a hedged book posts far less margin than the sum of its positions. Funding all this margin over a trade's life is the real cost behind MVA.
🎛 SIMM calculator
Your rate sensitivities — DV01 per tenor ($/bp; ± = long/short)
Initial margin you must post (SIMM)
$667,655
If risks didn't offset
$1,299,000
Diversification benefit
−$631,345
Since 2016, two banks trading uncollateralized derivatives must each post initial margin — a buffer sized by the industry-standard ISDA SIMM model. It weights each risk sensitivity by a regulatory risk weight, then aggregates them with a correlation matrix — so offsetting positions (a long and a short) need far less margin than the sum of their parts. Set opposite signs across tenors and watch the benefit grow. Funding this margin is the cost behind MVA. Educational tool — not investment advice.
Things to try
- • Make every tenor the same sign (all long) — little offset, high margin.
- • Set adjacent tenors to opposite signs — the diversification benefit jumps.
- • Note the margin is always below the undiversified sum — that gap is why banks hedge.