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<div class="section" id="initial-margin-agreements">
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<h1>Initial Margin Agreements<a class="headerlink" href="#initial-margin-agreements" title="Permalink to this headline">¶</a></h1>
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<p>This app is a demonstration of how Corda can be used for the real world requirement of initial margin calculation and
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agreement; featuring the integration of complex and industry proven third party libraries into Corda nodes.</p>
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<div class="section" id="simm-introduction">
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<h2>SIMM Introduction<a class="headerlink" href="#simm-introduction" title="Permalink to this headline">¶</a></h2>
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<p>SIMM is an acronym for “Standard Initial Margin Model”. It is effectively the calculation of a “margin” that is paid
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by one party to another when they agree a trade on certain types of transaction. This margin is
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paid such that, in the event of one of the counterparties suffering a credit event
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(a financial term and a polite way to say defaulting, not paying the debts that are due, or potentially even bankruptcy),
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then the party that is owed any sum already has some of the amount that it should have been paid. This payment to the
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receiving party is a preventative measure in order to reduce the risk of a potentially catastrophic default domino
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effect that caused the <a class="reference external" href="https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008">Great Financial Crisis</a>,
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as it means that they can be assured that if they need to pay another party, they will have a proportion of the funds
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that they have been relying on.</p>
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<p>To enact this, in September 2016, the ISDA committee - with full backing from various governing bodies -
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<a class="reference external" href="http://www2.isda.org/news/isda-simm-deployed-today-new-industry-standard-for-calculating-initial-margin-widely-adopted-by-market-participants">issued a ruling on what is known as the ISDA SIMM ™ model</a>,
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a way of fairly and consistently calculating this margin. Any parties wishing to trade a financial product that is
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covered under this ruling would, independently, use this model and calculate their margin payment requirement,
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agree it with their trading counterparty and then pay (or receive, depending on the results of this calculation)
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this amount. In the case of disagreement that is not resolved in a timely fashion, this payment would increase
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and so therefore it is in the parties interest to reach agreement in a short as time frame as possible.</p>
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<p>To be more accurate, the SIMM calculation is not performed on just one trade - it is calculated on an aggregate of
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intermediary values (which in this model are sensitivities to risk factors) from a portfolio of trades; therefore
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the input to a SIMM is actually this data, not the individual trades itself.</p>
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<p>Also note that implementations of the SIMM are actually protected and subject to license restrictions by ISDA
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(this is due to the model itself being protected). We were fortunate enough to technically partner with
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<a class="reference external" href="http://www.opengamma.com">OpenGamma</a> who allowed us to demonstrate the SIMM process using their proprietary model.
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In the source code released, we have replaced their analytics engine with very simple stub functions that allow
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the process to run and can easily be swapped out in place for their real libraries.</p>
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</div>
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<div class="section" id="process-steps">
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<h2>Process steps<a class="headerlink" href="#process-steps" title="Permalink to this headline">¶</a></h2>
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<dl class="docutils">
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<dt>Preliminaries</dt>
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<dd><ul class="first last simple">
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<li>Ensure that there are a number of live trades with another party financial products that are covered under the
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ISDA SIMM agreement (if none, then use the demo to enter some simple trades as described below).</li>
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</ul>
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</dd>
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<dt>Initial Margin Agreement Process</dt>
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<dd><ul class="first last simple">
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<li>Agree that one will be performing the margining calculation against a portfolio of trades with another party, and agree the trades in that portfolio. In practice, one node will start the flow but it does not matter which node does.</li>
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<li>Individually (at the node level), identify the data (static, reference etc) one will need in order to be able to calculate the metrics on those trades</li>
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<li>Confirm with the other counterparty the dataset from the above set</li>
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<li>Calculate any intermediary steps and values needed for the margin calculation (ie sensitivities to risk factors)</li>
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<li>Agree on the results of these steps</li>
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<li>Calculate the initial margin</li>
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<li>Agree on the calculation of the above with the other party</li>
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<li>In practice, pay (or receive) this margin (omitted for the sake of complexity for this example)</li>
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</ul>
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</dd>
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</dl>
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</div>
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<div class="section" id="running-the-app">
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<h2>Running the app<a class="headerlink" href="#running-the-app" title="Permalink to this headline">¶</a></h2>
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<p>The demonstration can be run in two ways - via IntelliJ (which will allow you to add breakpoints, debug, etc), or via gradle and the command line.</p>
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<p>Run with IntelliJ:</p>
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<div class="highlight-kotlin"><div class="highlight"><pre><span></span>1. Open the `cordapp-samples` project with IntelliJ
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2. Run the shared run configuration "SIMM Valuation Demo"
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3. Browse to http://localhost:10005/web/simmvaluationdemo
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</pre></div>
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</div>
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<p>Run via CLI:</p>
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<div class="highlight-kotlin"><div class="highlight"><pre><span></span>1. Navigate to the `cordapp-samples` directory in your shell
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2. Run the gradle target `deployNodes` (ie; ./gradlew deployNodes for Unix or gradlew.bat on Windows)
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1. Unix: `cd simm-valuation-demo/build/nodes && ./runnodes`.
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2. Windows: `cd simm-valuation-demo/build/nodes & runnodes.bat`
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4. Browse to http://localhost:10005/web/simmvaluationdemo
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</pre></div>
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</div>
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