What is IRM 2.0?
ICE Risk Model 2.0 (IRM 2.0) is the new initial margining (IM) model developed by ICE to replace the existing ICE Risk Model (IRM 1.0) for exchange traded futures and options. IRM 2.0 is a portfolio based IM model which utilizes Filtered Historical Simulation in its approach to estimating risk.
Why is ICE replacing IRM 1.0?
The existing ICE Risk Model (IRM 1.0) is a parametric model within which a multiplicity of parameters are “defined” and are used for the ultimate computation of margin. The number of parameters required is currently in hundreds of thousands these parameters be kept under constant review and maintained on a regular basis in order that these remain representative of current market conditions.
Most importantly, in addition to being operationally intensive, the use of specific parameters for each and every charge or credit is not optimally efficient from a statistical standpoint- particularly so when applying IM offsets between products.
IRM 2.0, in contrast, models the portfolio as a whole which allows for all possible offsets to be reflected in the final IM value.
Why should Members and Customers have confidence in IRM 2.0?
At its core, IRM 2.0 is based on established, best practices which aligns with the approach of Member’s own Risk Management approaches.
In common with most financial institutions, the Clearing House employs a multi-faceted and independently reviewed Data and Model Governance structure (the Model Governance framework). This necessitates a significant degree of both independent internal validation and independent external validation of its methods and models.
Independent External Validation
The Clearing House enlists established, industry experts from outside the organization to undertake independent review of the model and its results.
All model documentation together with internal and external validation reports are submitted to the relevant regulators for their own review. IRM 2.0 will be reviewed by all the regulators in the applicable jurisdictions.
The IRM 2.0 implementation will be subjected to rigorous back-testing as a matter of course.
As part of the rollout of IRM 2.0, ICE will operate IRM 2.0 in parallel with the existing IRM 1.0 model for a limited period. During this period, Members will have access to both IRM 2.0 and IRM 1.0 margin results and data allowing for direct comparison.
Will IRM 2.0 be employed across all ICE Clearing Houses?
IRM 2.0 will initially be utilized by ICE Clear U.S. for margining of exchange listed Equity Index Futures. It will subsequently be rolled out to other product groups and other ICE Clearing Houses in discrete implementation phases.
ICE’s CDS services operated by both ICE Clear Credit and ICE Clear Europe will continue to utilize the existing CDS margin methodology for the foreseeable future.
What tools will be available to my Customers?
ICE is providing ICE Portfolio Analytics (IPA), a web-based calculator UI for initial margin analysis. This will provide a web-based interface through which portfolios can be submitted and margin results obtained.
Do I need to obtain and load IRM 2.0 risk array files into ICE Portfolio Analytics?
No, IPA does not require any additional input from the user to calculate IRM 2.0 margin values aside from the portfolios they wish to analyze. Furthermore, IPA also automatically retrieves and loads the appropriate risk arrays for IRM 1.0 supported products.
Does IRM 2.0 include a measure of liquidity risk or position concentration risk?
Yes, IRM 2.0 contains a Liquidity Risk Charge (LRC) model. The LRC is comprised of separate ‘Bid/Ask’ and ‘Concentration’ charge components.
I am an FCM, I already make a GCM submission; can I use this to get my Customer Margin Requirements?
Yes. Where FCM’s are concerned, those firms are already submitting Customer positions to the Clearing House at end of day, in the form of GCM submissions. The results of the Clearing House margin calculations on each submitted Customer portfolio are available to FCMs and the customer margin results generated from that process may be used within their back-office.
What is the schedule for IRM 2.0 implementation?
ICE Equity Index Futures cleared at ICE Clear U.S. went live under IRM 2.0 on January 24, 2022. Rollout of additional products will be implemented in successive stages. Timelines will be provided on the ICE website and through clearinghouse notices once confirmed.
Does IRM 2.0 calculate different IM values for long and short positions?
Yes, IRM 2.0 estimates potential losses on long and short positions separately, in exceptional cases of symmetry the long and short IM values may be identical.
How often are the IRM 2.0 IM values updated?
The model calculates new IM values after each valid clearing business date enabling the model to be reactive to current market conditions.