Validation of pro forma-initial margin models

What is the validation of pro forma initial margin models?

Market participants ("counterparties") entering into OTC derivative contracts not cleared by a CCP must have appropriate arrangements to measure, monitor and mitigate operational and counterparty credit risks in place. When transaction volumes reach significant levels, counterparties are required to exchange initial margins.

Initial margins may be calculated using the standardised grid approach or initial margin models.
Where models are used, counterparties must seek authorisation from their competent authority for the use of such a model for initial margin calculation.

Since many counterparties rely on industry‑wide pro forma models, these models are unlikely to be significantly modified by single users or individual competent authorities. Because the same model is used by many counterparties, a coordination problem arises.

The EBA’s role as central validator

To address this coordination problem, the EBA acts as central validator of pro forma initial margin models.
The EBA validates the elements and general aspects of these models, including:

• calibration
• design
• coverage of instruments, asset classes and risk factors

The EBA monitors the evolution and performance of the model on an ongoing basis. When the model developer introduces changes, the EBA assesses those changes and whether they require a revalidation of the model.

At present, the only pro forma model in use is the Standard Initial Margin Model developed by ISDA (ISDA SIMM).

The EBA declared its readiness to perform this role from 1 March 2026. 

Legal and regulatory framework

The validation and authorisation of initial margin models rely on a set of EU legal instruments that establish the requirements for OTC derivatives not cleared by a CCP, define the technical standards for initial margin models, and specify how competent authorities and the EBA carry out their respective roles.

EMIR (Regulation (EU) No 648/2012) sets out the overall regulatory requirements for risk-mitigation techniques, which are further specified in Regulation (EU) 2016/2251 ('Joint ESAs RTS').

In particular, those regulations define:

• the obligation for counterparties to exchange collateral for non‑centrally cleared OTC derivatives, where certain conditions are met;
• the possibility to calculate initial margins using either the standardised grid approach or an initial margin model;
• the requirement for counterparties to obtain authorisation from their competent authority before using an initial margin model;
• the requirements that initial margin models must meet, including appropriate calibration, risk sensitivity and governance arrangements.

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