SUBJECT TO CHANGE BY ISDA
MARCH 9, 2023

ISDA SIMM® REMEDIATION ANNEX
to the ISDA SIMM Governance Framework
March 9, 2023

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SUBJECT TO CHANGE BY ISDA
MARCH 9, 2023

1Introduction

The ISDA SIMM Governance Framework (the “Framework”) sets out the principles under which the
ISDA Standard Initial Margin Model (“SIMM”) will operate and the process through which it will bereviewed and amended on a consistent and transparent basis. Specifically, the Framework providesfor:• Global SIMM governance and development in coordination with SIMM users and regulators;and• Firm level portfolio monitoring including the adequacy of SIMM coverage at the counterparty
level by each firm, the escalation of issues to ISDA, and remediation of associated risk coverage
shortfalls of SIMM.
This annex contains the thresholds, procedures, and timelines to supplement the principles containedin the Framework.
Under the terms of the license agreements required by ISDA, SIMM users are required to implement
SIMM pursuant to the documentation provided by ISDA. Such documentation includes, but is notlimited to, the version of the ISDA SIMM Methodology currently in effect, the current version of theRisk Data Standards and the governance requirements provided in the Framework, as supplemented
by this ISDA SIMM Remediation Annex.

2Monitoring, reporting and remediation thresholds

2.1

2.4

The Portfolio Monitoring Threshold (for SIMM margin) is:• an amount of EUR 0 for portfolios which have non-zero collected collateral by either party• an amount of EUR 25 million for all other portfolios
The Reporting Threshold (for a SIMM shortfall amount) consists of two cases:• The Red Reporting Threshold (for a SIMM shortfall amount) is the maximum of EUR 10million and 15% of the portfolio SIMM margin amount.
• The Amber Reporting Threshold (for a SIMM shortfall amount) is EUR 100 million
The Remediation Threshold (for a SIMM shortfall amount) is the maximum of EUR 25 millionand 15% of the SIMM margin amount.
The Portfolio Reporting Frequency is quarterly (every 3 months).

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Remediation procedures

3.1

Firms must remediate any portfolio which, on a testing day, is either:• ‘Red’ under the “1+3” test and has a “1+3” shortfall in excess of the remediation threshold,as specified in section 2.3 above; OR• ‘Red’ and has an “Actual PnL” or a “1+3” shortfall in excess of the remediation threshold, asspecified in section 2.3 above, that is caused by the absence of a Risk not in SIMM (seesection 5 for details)
Firms may agree, but are not required, to remediate portfolios which are ‘Amber’ or have ashortfall less than the remediation threshold in section 2.3 above;
Remediation actions, as listed in section III.C. of the Framework, should make the portfolio go‘Green’;Changes to the portfolio’s trade composition, whether managed or unmanaged, are not treatedas remediation actions;

The following thresholds apply in respect of section III.A. of the Framework:

2.2

2.3

The following procedures supplement the Remediation principles specified in section III.D. of theFramework:

3.2
3.3
3.4

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3.5

3.7

Remediation continues for as long as the un-remediated portfolio requires remediation. The
remediation measure (such as the fixed add-on amount or the SIMM multiplier) may need tovary to ensure that the remediated portfolio is kept as ‘Green’;
The decision on whether or not to remediate a portfolio depends only on its current state anddoes not depend on its backtesting history;
Testing can take place more often than once a quarter if a firm wishes.

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Remediation timelines

4.1

Issues should be communicated from one party to the other within 20 business days of thetesting date; andCounterparties should agree the issue and complete remediation actions within 40 businessdays of the testing date.

3.6

The following remediation timelines apply in respect of section III.E. of the Framework:

4.2

5

Governance of Risk not in SIMM•

The 1+3 backtest, which forms the basis for the exchange of additional initial margin if there is aSIMM ‘shortfall’ and the shortfall breaches a certain threshold. For the monitoring exercise, therecent period rolls with time, to provide a partially out-of-sample test which contains more up-todate information.

•The Actual P&L test, which is used to check if there are risks not modelled in the SIMM that aredriving any material and widespread under-margining in the SIMM.

As part of the quarterly monitoring exercise, two tests, which are both capable of identifying risk notin SIMM (RNIS) are performed:

This subsequent section summarises the process for the Forum to act on evidence that suggests there
are RNIS issues in portfolios that use SIMM for initial margin calculations.
5.1 Principles for identifying RNIS issues
Firms should follow the same procedure that they currently do in the quarterly monitoring exercise
for identifying the causes of exceptions. These procedures are summarised as follows:••

Firms should identify the single main cause of an exception
Where there are multiple causes for an exception, firms should make a reasonable decision onwhich is the most significant driver for the exception

Here are examples that are not RNIS:••

Exceptions caused by market-observed risk weights being greater than those of SIMM risk factors
Exceptions resulting from market-observed correlations being different than the SIMMcorrelations

Here are examples that are RNIS:••••

Basis between Loan Credit Default Swap and Loan Credit Default Index
Absence of cross currency basis swap term structure in SIMM
Inflation index basis
Absence of Inflation term structure in SIMM

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Higher order sensitivities of risk factors which are in SIMM e.g., third-order and higher-ordersensitivities of SIMM risk factors.
Movements in a market-observed price which is neither an existing SIMM risk factor nor mostly
driven by existing SIMM risk factors.

5.2 Principles for taking action to address RNIS issues
Here are the principles for taking industry and firm-level action to address RNIS issues.
5.2.1 Principles for taking industry-wide action for RNIS issues
The principles for assessing issues in the quarterly monitoring exercise also applies to assessing issues
due to RNIS. During each quarterly monitoring exercise, issues due to RNIS are assessed based on thefollowing principles:•••

Systemic – an issue occurs across the industry and is not just focused on a small number of firms
Persistent – an issue occurs on more than one occasion
Material – an issue has a significant size and impact

To be a significant issue, an issue due to RNIS should be categorised as systemic, persistent andmaterial under either the 1+3 or Actual backtests. (This condition is deemed to hold if the issue issystemic under either backtest, and persistent under either backtest, and material under eitherbacktest.)
5.2.2 Principles for taking bilateral action for RNIS issues
At a firm level, a portfolio requires bilateral remediation for RNIS, if the absence of a RNIS causes aRed exception with a shortfall that breaches the remediation threshold, under either the 1+3 or Actual
backtests.
5.3 Actions to address identified RNIS issues
In the case where a RNIS is identified by a firm as the driver for an issue on a portfolio that is marginedusing SIMM, the firm would need to bilaterally remediate the portfolio if the conditions in section
5.2.2 are satisfied. Then the firm would need to remediate the portfolio in accordance with the SIMM
Governance Framework and the timelines specified in 4.
In the case where the conditions in section 5.2.1 are satisfied, the Forum should consider incorporating
the risk factor not in SIMM into the SIMM methodology if it is practical to do so. If the issue is not
significant, then the Forum may or may not still take further action, as may seem desirable.

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