Initial margin developments and best practices in 2025
11 November 2025
Giuseppe Alessio Caccamo, senior lead, product analysis and design at S&P Global Market Intelligence, highlights the significance of initial margin, exploring best practices for margin assessment and the importance of ongoing validation processes
Image: stock.adobe.com/Naphol
While the Uncleared Margin Rules (UMR) is no longer a topic that dominates the headlines, 2025 still brought some key developments to the initial margin (IM) framework.
From new jurisdictions that came into scope, such as Mexico, to the introduction of the EU IM model authorisation requirement under EMIR 3.0, all the way to the main news this year — the shift to semi-annual calibration of the International Swaps and Derivatives Association’s (ISDA’s) Standard Initial Margin Model (SIMM) — IM is still a topic that keeps collateral and risk teams very busy.
Recent developments in initial margin
IM is a daily collateral requirement forming a critical part of the broader collateral management framework. In 2025, three major changes have taken place:
1. Mexico joins IM jurisdictions
Most major jurisdictions — such as the US, EU, UK, and Japan — completed their IM rollouts by 2022. Mexico, however, followed a staggered approach:
As of 31 December 2024: Banks, broker-dealers, and investment funds began exchanging IM.
By 30 September 2025: Development banks and non-financial entities had to comply.
2. Semi-annual SIMM calibration
Starting in 2025, ISDA SIMM will shift to a semi-annual calibration cycle, marking a significant change in the model’s governance and responsiveness to market conditions.
Under the new framework, there will be two calibrations per year:
• Primary calibration (H1): A full recalibration of all SIMM parameters, including delta, curvature, vega risk weights, cross-asset correlations, concentration thresholds, and other model inputs.
• Secondary calibration (H2): A targeted recalibration focused specifically on the main delta risk weights, leaving other parameters unchanged.
The recent changes to the SIMM have significant structural implications for margin efficiency, operational readiness and risk forecasting.
SIMM is now expected to be more responsive to market volatility, with risk weights updated more frequently than the previous annual schedule. This responsiveness helps align margin requirements with actual market conditions, reducing the risk of sudden margin adjustments during periods of market stress and aiding firms in managing capital and liquidity more effectively.
However, these changes also introduce challenges for firms. More frequent calibrations may lead to fluctuations in IM every six months, impacting funding needs and liquidity planning and collateral management strategies even when portfolios remain unchanged.
Additionally, the increased operational complexity requires faster model validation, system upgrades for new SIMM versions, and closer coordination with custodians and counterparties to manage these changes effectively.
3. EU IM model authorisation (EMIR 3.0)
EMIR 3.0, effective 24 December 2024, amended Regulation (EU) No 648/2012 to introduce a formal authorisation requirement for IM models used for non-centrally cleared derivatives. It also designated the European Banking Authority (EBA) as the central validator of such models, referred to as pro forma models.
ISDA SIMM qualifies as a pro forma model, as it is developed, published, and maintained through market-led initiatives. As a result, all EU counterparties — financial and non-financial — using SIMM to exchange IM are subject to the authorisation requirement, regardless of which party calculates the SIMM amounts. ISDA SIMM v2.7+2412, published on 22 May 2025, and effective from 12 July 2025, triggered the initial application requirement for EU counterparties wishing to continue using the model.
Although v2.7+2412 is a recalibration with no structural model changes, it still falls under the initial authorisation requirement. However, going forward, pure recalibrations of SIMM will not require reauthorisation. To assist firms with the application process, ISDA has issued guidance to support data preparation and promote a consistent approach across counterparties.
Validation through backtesting
ISDA SIMM effectiveness can only be validated through ongoing and systematic backtesting. Backtesting is the procedure that generates a statistical measure that reflects the confidence level of a given margin model in relation to current market conditions, and the risks present in the portfolio.
To ensure accuracy and compliance, validation and performance monitoring through backtests must be conducted continuously. In practice, counterparties may demand amounts exceeding a firm’s calculated margin, necessitating a robust defense of the firm’s position through reconciliation of IM amounts with counterparties. This requires a strong operational process with effective quality control.
Daily comparisons of mark-to-market values, risk sensitivities, and changes in IM at the trade level against their three-month averages and standard deviations, help identify any abnormal movements. If any anomalies are detected, an analyst intervenes to clarify the daily changes.
SIMM backtesting can be broken down into two key calculations:
• Dynamic backtesting: This involves comparing SIMM against actual profit and loss over a 10-day margin period of risk. This approach enables firms to detect shifts in the market environment and assess risks not captured by SIMM, allowing for real-time monitoring of SIMM’s adequacy.
• Static backtesting: This method compares SIMM against historical market movements and requires:
• Accurate derivatives pricing models.
• Sufficient computational power, as firms must evaluate approximately 1,050 historical scenarios against their portfolios over a three-plus-one years time period.
• A comprehensive set of historical time-series data for all relevant risk factors, including periods of stress such as the financial crisis of 2008-09.
• A sound and robust methodology for historical time series and risk factor proxies. It is important to note that historical data across all risk factors may not be widely available. For instance, some equities underlying derivatives portfolios may not have existed during the stress period, necessitating the creation of theoretical trading performance data to complete backtesting calculations.
By implementing rigorous backtesting practices, firms can enhance their risk management strategies and ensure the reliability of their margin calculations. While not all jurisdictions currently mandate backtesting, there has been a noticeable increase in the number of firms adopting it over the past year.
Pre-trade margin assessment
Posting margin incurs a tangible economic cost, making it essential for firms to understand and minimise both current and future margin requirements. A pre-trade IM calculator is a valuable tool in achieving this objective. It allows firms to assess the initial margin needed for new products they plan to trade, facilitating informed decision-making prior to trade execution.
Moreover, the pre-trade IM calculator enables firms to compare margin costs across different counterparties, optimising execution strategies. Since initial margin is calculated at the portfolio level (i.e. for each netting set), the cost of incremental IM is influenced by the risk profile of the existing portfolio. When there is greater offsetting risk within the existing portfolio, the incremental margin requirement will be lower. In some cases, the incremental IM amount may even be negative if the new trade sufficiently reduces the overall risk of the portfolio.
By leveraging a pre-trade IM calculator, firms can effectively manage their margin requirements, ultimately enhancing their trading efficiency and cost-effectiveness.
Data quality: The foundation of reliable margining
Numbers coming from the finest model that is not backed by good data will not be reliable. Data quality underpins every step of the margining process. S&P Global Market Intelligence leverages premium data sources, including the sell side consensus service TOTEM — which serves as foundational inputs for model calibration and margin calculation, enhancing reliability of pricing and risk assessments.
Customer support for derivatives inquiries
S&P Global Market Intelligence is committed to providing dedicated client support for derivatives-related inquiries. Dedicated teams of subject matter experts and quantitative analysts operate across multiple time zones, providing 24/5 coverage. Their response protocols include resolution of simple queries by the next business day and escalation of complex issues to specialised teams for thorough analysis.
Our multi layered support structure that includes product specialists, as well as quant analysts, is key in helping clients solve complex challenges that arise from collateral calls. Support is available via email, phone, and in-person and virtual meetings, ensuring personalised and responsive service.
Case study: Bond TRS discrepancy
Even simple instruments like bond total return swaps (TRS) can present operational challenges. In a recent case, a margin discrepancy emerged despite the product’s apparent simplicity. After extended investigation, we found that the counterparty was using a projection method for IM, while both parties were using spot and accrual for variation margin.
This highlights the importance of having both a deep understanding of product behaviour, as well as a responsive support team to resolve breaks efficiently.
Conclusion
The ISDA SIMM calculation process demands meticulous attention to ensure the use of high-quality data and advanced analytics. Failure to uphold these standards can lead to insufficient margin collection, excessive margin posting, inability to contest counterparty margin calls effectively, and reduced efficacy of derivatives strategies due to elevated funding costs.
S&P Global Market Intelligence’s Portfolio Margins service addresses these needs comprehensively through four core components:
• Reliable risk sensitivities and initial margin calculations: Employing ISDA SIMM and schedule-based models to deliver precise, compliant margin calculations.
• Backtesting: Conducting rigorous validation of SIMM outputs and any additional margin requests to enhance reliability and confidence.
• Initial margin monitoring: Providing continuous tracking of margin thresholds to facilitate proactive management and timely responses to regulatory changes.
• Pre-trade assessment: Evaluating potential margin impacts prior to trade execution to support informed, strategic decision-making.
The service combines high-quality market data industry best practices, a comprehensive product coverage, including vanilla and exotic OTC derivatives, advanced in-house scripting capabilities for any payoff type, as well as accurate calibration to consensus data sources like TOTEM.
Backed by exceptional customer support and deep market expertise, this integrated solution helps firms navigate increasing regulatory complexity, supporting strategic decision-making in risk, capital, and liquidity management while enhancing margin efficiency and operational effectiveness.
From new jurisdictions that came into scope, such as Mexico, to the introduction of the EU IM model authorisation requirement under EMIR 3.0, all the way to the main news this year — the shift to semi-annual calibration of the International Swaps and Derivatives Association’s (ISDA’s) Standard Initial Margin Model (SIMM) — IM is still a topic that keeps collateral and risk teams very busy.
Recent developments in initial margin
IM is a daily collateral requirement forming a critical part of the broader collateral management framework. In 2025, three major changes have taken place:
1. Mexico joins IM jurisdictions
Most major jurisdictions — such as the US, EU, UK, and Japan — completed their IM rollouts by 2022. Mexico, however, followed a staggered approach:
As of 31 December 2024: Banks, broker-dealers, and investment funds began exchanging IM.
By 30 September 2025: Development banks and non-financial entities had to comply.
2. Semi-annual SIMM calibration
Starting in 2025, ISDA SIMM will shift to a semi-annual calibration cycle, marking a significant change in the model’s governance and responsiveness to market conditions.
Under the new framework, there will be two calibrations per year:
• Primary calibration (H1): A full recalibration of all SIMM parameters, including delta, curvature, vega risk weights, cross-asset correlations, concentration thresholds, and other model inputs.
• Secondary calibration (H2): A targeted recalibration focused specifically on the main delta risk weights, leaving other parameters unchanged.
The recent changes to the SIMM have significant structural implications for margin efficiency, operational readiness and risk forecasting.
SIMM is now expected to be more responsive to market volatility, with risk weights updated more frequently than the previous annual schedule. This responsiveness helps align margin requirements with actual market conditions, reducing the risk of sudden margin adjustments during periods of market stress and aiding firms in managing capital and liquidity more effectively.
However, these changes also introduce challenges for firms. More frequent calibrations may lead to fluctuations in IM every six months, impacting funding needs and liquidity planning and collateral management strategies even when portfolios remain unchanged.
Additionally, the increased operational complexity requires faster model validation, system upgrades for new SIMM versions, and closer coordination with custodians and counterparties to manage these changes effectively.
3. EU IM model authorisation (EMIR 3.0)
EMIR 3.0, effective 24 December 2024, amended Regulation (EU) No 648/2012 to introduce a formal authorisation requirement for IM models used for non-centrally cleared derivatives. It also designated the European Banking Authority (EBA) as the central validator of such models, referred to as pro forma models.
ISDA SIMM qualifies as a pro forma model, as it is developed, published, and maintained through market-led initiatives. As a result, all EU counterparties — financial and non-financial — using SIMM to exchange IM are subject to the authorisation requirement, regardless of which party calculates the SIMM amounts. ISDA SIMM v2.7+2412, published on 22 May 2025, and effective from 12 July 2025, triggered the initial application requirement for EU counterparties wishing to continue using the model.
Although v2.7+2412 is a recalibration with no structural model changes, it still falls under the initial authorisation requirement. However, going forward, pure recalibrations of SIMM will not require reauthorisation. To assist firms with the application process, ISDA has issued guidance to support data preparation and promote a consistent approach across counterparties.
Validation through backtesting
ISDA SIMM effectiveness can only be validated through ongoing and systematic backtesting. Backtesting is the procedure that generates a statistical measure that reflects the confidence level of a given margin model in relation to current market conditions, and the risks present in the portfolio.
To ensure accuracy and compliance, validation and performance monitoring through backtests must be conducted continuously. In practice, counterparties may demand amounts exceeding a firm’s calculated margin, necessitating a robust defense of the firm’s position through reconciliation of IM amounts with counterparties. This requires a strong operational process with effective quality control.
Daily comparisons of mark-to-market values, risk sensitivities, and changes in IM at the trade level against their three-month averages and standard deviations, help identify any abnormal movements. If any anomalies are detected, an analyst intervenes to clarify the daily changes.
SIMM backtesting can be broken down into two key calculations:
• Dynamic backtesting: This involves comparing SIMM against actual profit and loss over a 10-day margin period of risk. This approach enables firms to detect shifts in the market environment and assess risks not captured by SIMM, allowing for real-time monitoring of SIMM’s adequacy.
• Static backtesting: This method compares SIMM against historical market movements and requires:
• Accurate derivatives pricing models.
• Sufficient computational power, as firms must evaluate approximately 1,050 historical scenarios against their portfolios over a three-plus-one years time period.
• A comprehensive set of historical time-series data for all relevant risk factors, including periods of stress such as the financial crisis of 2008-09.
• A sound and robust methodology for historical time series and risk factor proxies. It is important to note that historical data across all risk factors may not be widely available. For instance, some equities underlying derivatives portfolios may not have existed during the stress period, necessitating the creation of theoretical trading performance data to complete backtesting calculations.
By implementing rigorous backtesting practices, firms can enhance their risk management strategies and ensure the reliability of their margin calculations. While not all jurisdictions currently mandate backtesting, there has been a noticeable increase in the number of firms adopting it over the past year.
Pre-trade margin assessment
Posting margin incurs a tangible economic cost, making it essential for firms to understand and minimise both current and future margin requirements. A pre-trade IM calculator is a valuable tool in achieving this objective. It allows firms to assess the initial margin needed for new products they plan to trade, facilitating informed decision-making prior to trade execution.
Moreover, the pre-trade IM calculator enables firms to compare margin costs across different counterparties, optimising execution strategies. Since initial margin is calculated at the portfolio level (i.e. for each netting set), the cost of incremental IM is influenced by the risk profile of the existing portfolio. When there is greater offsetting risk within the existing portfolio, the incremental margin requirement will be lower. In some cases, the incremental IM amount may even be negative if the new trade sufficiently reduces the overall risk of the portfolio.
By leveraging a pre-trade IM calculator, firms can effectively manage their margin requirements, ultimately enhancing their trading efficiency and cost-effectiveness.
Data quality: The foundation of reliable margining
Numbers coming from the finest model that is not backed by good data will not be reliable. Data quality underpins every step of the margining process. S&P Global Market Intelligence leverages premium data sources, including the sell side consensus service TOTEM — which serves as foundational inputs for model calibration and margin calculation, enhancing reliability of pricing and risk assessments.
Customer support for derivatives inquiries
S&P Global Market Intelligence is committed to providing dedicated client support for derivatives-related inquiries. Dedicated teams of subject matter experts and quantitative analysts operate across multiple time zones, providing 24/5 coverage. Their response protocols include resolution of simple queries by the next business day and escalation of complex issues to specialised teams for thorough analysis.
Our multi layered support structure that includes product specialists, as well as quant analysts, is key in helping clients solve complex challenges that arise from collateral calls. Support is available via email, phone, and in-person and virtual meetings, ensuring personalised and responsive service.
Case study: Bond TRS discrepancy
Even simple instruments like bond total return swaps (TRS) can present operational challenges. In a recent case, a margin discrepancy emerged despite the product’s apparent simplicity. After extended investigation, we found that the counterparty was using a projection method for IM, while both parties were using spot and accrual for variation margin.
This highlights the importance of having both a deep understanding of product behaviour, as well as a responsive support team to resolve breaks efficiently.
Conclusion
The ISDA SIMM calculation process demands meticulous attention to ensure the use of high-quality data and advanced analytics. Failure to uphold these standards can lead to insufficient margin collection, excessive margin posting, inability to contest counterparty margin calls effectively, and reduced efficacy of derivatives strategies due to elevated funding costs.
S&P Global Market Intelligence’s Portfolio Margins service addresses these needs comprehensively through four core components:
• Reliable risk sensitivities and initial margin calculations: Employing ISDA SIMM and schedule-based models to deliver precise, compliant margin calculations.
• Backtesting: Conducting rigorous validation of SIMM outputs and any additional margin requests to enhance reliability and confidence.
• Initial margin monitoring: Providing continuous tracking of margin thresholds to facilitate proactive management and timely responses to regulatory changes.
• Pre-trade assessment: Evaluating potential margin impacts prior to trade execution to support informed, strategic decision-making.
The service combines high-quality market data industry best practices, a comprehensive product coverage, including vanilla and exotic OTC derivatives, advanced in-house scripting capabilities for any payoff type, as well as accurate calibration to consensus data sources like TOTEM.
Backed by exceptional customer support and deep market expertise, this integrated solution helps firms navigate increasing regulatory complexity, supporting strategic decision-making in risk, capital, and liquidity management while enhancing margin efficiency and operational effectiveness.
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