When global margin requirements for non-cleared derivatives took effect in September 2016, financial institutions faced a significant challenge: how could counterparties calculate and exchange initial margin consistently without triggering widespread disputes, excessive costs and operational disruption?

The solution was the ISDA Standard Initial Margin Model (ISDA SIMM), developed through industry collaboration under the International Swaps and Derivatives Association (ISDA). A decade later, the model, permitted by regulators for use in more than 40 countries, is used by over 400 groups of entities worldwide. According to estimates cited by ISDA, it supports margin calculations across more than 21,000 portfolios, with approximately $1 trillion in initial margin collected using the framework.

Speaking on Episode 60 of ISDA’s The Swap podcast, Modelling Margin, Eduardo Epperlein, Managing Director at Nomura International, and Tomo Kodama, Managing Director at Bank of America Merrill Lynch, discussed the model’s development, its performance during periods of volatility and the challenges ahead.

According to Kodama, firms initially had the option of using the standard margin grid developed by regulators or creating their own proprietary models. However, the regulatory approach did not adequately recognize offsetting risks within portfolios, while proprietary models could produce significantly different margin calculations between counterparties.

“The alternative world would be much more expensive, more uncertain, less transparent, and more operationally difficult,” Kodama said.

He explained that different methodologies could have resulted in persistent disputes, unpredictable liquidity requirements and difficulties reconciling margin calls. Smaller firms might also have struggled to replicate calculations produced by larger institutions.

Kodama recalled that industry participants began raising these concerns with regulators in 2013, eventually approaching ISDA to coordinate the development of a common framework.

The objective, he explained, was to establish a model that was transparent, risk-sensitive, reproducible and sufficiently straightforward for firms of different sizes. “We always thought that SIM could be used globally by all participants,” Kodama said, emphasizing the importance of fair and responsible governance.

“Without that level of coordination and without that level of transparency, there was no way the margin rules would have been implemented without some level of market disruption,” added Scott O’Malia, Chief Executive of ISDA.

Developing the model also required agreement on legal documentation, data exchange formats, reconciliation procedures and operational standards. According to Kodama, ISDA established industry committees covering documentation, margin operations, risk data and methodology.

Epperlein noted that individual firms initially favored developing their own models, but a common approach was necessary to avoid the problems associated with different methodologies. He explained that the resulting framework drew on regulatory sensitivity-based methodologies, adapted and calibrated for counterparty exposure measurement.

Epperlein described the governance arrangements supporting SIMM, including weekly industry meetings where participants examine model performance and consider improvements. He said regulators also receive detailed calibration, backtesting and monitoring information. “We had to design a backtesting process that was also commonly understood by the industry,” Epperlein explained.

According to Epperlein, the industry developed a common monitoring framework supported by data contributed by participating firms, rather than relying on the institution-by-institution assessments traditionally used for proprietary capital models.

Quarterly backtesting reports are compiled and shared with regulators to assess whether the model continues to meet its intended risk coverage. Kodama acknowledged that no single mathematical model could adequately capture every possible portfolio without becoming prohibitively complicated. He explained that the framework therefore includes procedures for identifying portfolios requiring additional margin.

In the most recent quarterly monitoring exercise cited by Kodama, only 13 of more than 11,000 portfolios examined required remediation through portfolio adjustments or additional collateral to meet the 99% risk coverage standard.

O’Malia noted that the model has undergone 17 changes over its first decade, incorporating lessons from market developments and periods of volatility. “It’s the constant care and feeding that we’ve given to this thing that makes it so relevant today. And I think that’s really its strength,” he said.

Managing margin during market stress

One of SIMM’s defining objectives, according to Epperlein, has been limiting procyclicality, where margin requirements increase sharply during market turmoil, potentially intensifying liquidity pressures. He explained that the model’s calibration incorporates at least four years of historical data, including a stressed period representing 25% of the sample. This approach, he said, is intended to prevent margin requirements from responding too aggressively to short-term volatility.

Discussing the model’s performance during the March 2020 dash for cash and the UK gilt crisis in 2022, Epperlein said SIMM had performed well, with relatively limited adjustments required. He also pointed to comparisons with central counterparty margin models, which he said can exhibit greater procyclicality. “SIM is designed to be less pro-cyclical, a bit conservative, but that’s its strength,” Epperlein said.

Kodama emphasized the implications of stable margin requirements for firms’ funding and liquidity management. “Sure, it’s great to have low margins in good times, but in bad times, you don’t want those margin levels skyrocketing,” he said.

The model’s maintenance process has also evolved. According to O’Malia, ISDA moved from annual to semiannual calibration in 2025, allowing it to respond more frequently to changing market conditions while maintaining a predictable update schedule.

Epperlein explained that the change also established recalibration as a routine process that no longer requires separate regulatory pre-approval when the underlying methodology remains unchanged.

Looking ahead, the speakers discussed how SIMM could evolve alongside developments in derivatives markets. Kodama identified additional jurisdictions, particularly China, as well as new currencies, yield curves and financial products as potential areas requiring further development. He also pointed to tokenization and cryptocurrencies as areas that may eventually require closer consideration as their use becomes more widespread.

However, Kodama cautioned against introducing changes without sufficient evidence, warning that unnecessary modifications could introduce inconsistencies into the framework. “We want to be careful as we make changes,” he said.

The growth of supporting infrastructure has been another significant development. According to figures cited by ISDA, nearly 70 vendors now offer SIMM-related services. Kodama explained that standardized risk data and exchange formats have enabled service providers to develop tools for margin reconciliation, portfolio optimization and collateral management. He also emphasized that the model was developed as an industry utility rather than a framework designed to benefit any single institution.

Epperlein, who began his career as a physicist studying extreme behavior in laser fusion, described SIMM as a living model that must continue responding to changing risks. “It’s a standardized model with solid governance and very kind of well-defined protocol for model update, model change,” he said.

For Kodama, who recalled the September 2016 launch as an “emotional milestone”, the project remains a career highlight. “Most of all, I felt like I was doing something good, something constructive for the markets. That I was building something to give back to the industry that kind of nurtured me, I think,” Kodama said.