Mathematical Finance Seminar

Does Initial Margin Eliminate Counterparty Risk

Speaker: Leif B. Andersen, BAML and NYU Courant Institute

Location: Warren Weaver Hall 1302

Date: Tuesday, May 1, 2018, 5:30 p.m.


It is widely believed that mandatory posting of initial margin should effectively eliminate counterparty risk from bilateral trading.  We apply a new framework for collateralized exposure modelling that shows this is not necessarily true.  We demonstrate that time lags in the credit support annex between trade payments and margin reposting can produce exposure spikes that substantially exceed VAR-based initial margin levels.  Finally, we proposed ways to mitigate the effect.


Leif B. G. Andersen is the Global Co-Head of the Quantitative Strategies Group at Bank of America Merrilly Lynch.  He holds MSc's in Electrical and Mechanical Engineering from the Technical University of Denmark, an MBA from University of California at Berkeley, and a PhD in Finance from University of Aarhus Business School.  He was the co-recipient of Risk Magazine's 2001 and 2018 Quant of the Year Award, and has worked for a quarter century as a quantitative researcher in the derivatives pricing area.  He has authored influential research papers and books in all areas of quantitative finance, including the three-volume monograph "Interest Rate Modelling" (co-authored with Vladimir Piterbarg).  He is an Associate Editor of Journal of Computational Finance, and is an Adjunct Professor at Carnegie Mellon's Tepper School of Business and at NYU's Courant Institute.