Margin Period of Risk: MPOR Definition and Regulatory Floors

The margin period of risk is the window a bank assumes between its last successful collateral exchange with a counterparty and the point at which all of that counterparty’s positions have been fully closed out. Under the Basel framework, the standard floor is ten business days for non-centrally cleared derivatives with daily margining, and specific conditions push that floor to twenty business days or more.¹ Banks use this window as a core input for the capital they must hold against counterparty credit risk, which is why the exact number matters.

What the Window Actually Covers

When a counterparty misses a margin call, a sequence of legal and operational steps begins, and the assumed period has to be long enough to cover all of them under stress.

Under the 2002 ISDA Master Agreement, a failure to pay becomes an Event of Default if it is not remedied by the first local business day after the non-performing party receives notice of the failure.² From there, the non-defaulting party sends a formal default notice, terminates the covered trades, values the close-out amount (typically by soliciting dealer quotes), and then executes replacement trades or asset sales to neutralize the exposure. Each stage consumes business days, and the assumed window must accommodate all of them.

Regulatory Floor Durations

The Basel Committee on Banking Supervision and IOSCO set the global framework for margin on derivatives.³ The floors within that framework vary with how a trade is cleared, how often margin is exchanged, and which capital approach the bank uses. They are minimums: a bank must apply the higher of the supervisory floor or its own internal estimate of the time needed to close out a netting set.

SA-CCR Floors

Under the Standardized Approach to Counterparty Credit Risk, the baseline floors for margined transactions are ten business days for non-centrally cleared trades subject to daily margin agreements, and nine business days plus the re-margining period for non-centrally cleared trades not subject to daily margining. Centrally cleared transactions follow separate floors under the capital rules for exposures to central counterparties. These floors feed the maturity factor that determines how much exposure is recognized for capital purposes.¹

Internal Models Method Floors

Banks with supervisory approval to use the Internal Models Method face floors tied to what sits in the netting set. Netting sets consisting only of repo-style transactions subject to daily re-margining carry a five-business-day floor. All other netting sets subject to daily re-margining carry a ten-business-day floor. These IMM-specific floors apply to the bank’s own exposure simulations and sit alongside, not on top of, the SA-CCR floors.⁴

Central Counterparty Exposures

For OTC derivatives cleared through a central counterparty, a minimum of ten business days applies to trade exposure calculations. The twenty-day escalation described below for large netting sets does not apply to CCP-cleared transactions.⁵

CVA Framework Floors

The credit valuation adjustment framework applies its own floors. For securities financing transactions and client-cleared positions, the floor is four business days plus the re-margining period, meaning at least five days for daily margining. For all other transactions, the floor is nine business days plus the re-margining period.⁶ A bank can therefore end up using one figure for counterparty credit risk capital and a different one for CVA capital on the same book.

Triggers That Push the Floor to Twenty Days

Most complex portfolios do not sit at the ten-day floor for long. Three conditions extend the floor under both SA-CCR and the Internal Models Method.

If the number of trades in a netting set exceeds 5,000 at any point during a quarter, the floor rises to twenty business days for the following quarter.
If a netting set contains even one trade involving collateral that cannot be sold quickly at a fair price, or an OTC derivative that cannot be easily replaced, the floor rises to twenty business days. The framework defines “illiquid” here as the absence of continuously active markets where multiple price quotations could be obtained within two days without moving the market.
If a bank experiences more than two margin call disputes on a particular netting set over the previous two quarters that lasted longer than the applicable window, the supervisory floor for that netting set doubles for the next two quarters.

The dispute-doubling rule can carry a portfolio from ten days to twenty on operational friction alone, regardless of underlying asset liquidity.¹ And a single illiquid trade inside a large netting set inflates the modeled exposure for everything in that set, not just for itself.

How US Regulators Implement the Floor

Basel sets the global minimum; US rules apply it through two parallel regimes.

The Commodity Futures Trading Commission requires swap dealers and major swap participants to calculate initial margin for uncleared swaps using a holding period equal to the shorter of ten business days or the maturity of the swap or netting portfolio, at a one-tailed 99 percent confidence interval.⁷

For covered swap entities supervised by the prudential regulators (national banks, federal savings associations, and federal branches of foreign banks), the OCC, Federal Reserve Board, and FDIC impose the same ten-business-day holding period floor for non-cleared swaps and security-based swaps.⁸ These margin rules do not reach every counterparty. Commercial end-users that use swaps to hedge business risk rather than speculate are exempt, tracking the clearing exceptions under the Commodity Exchange Act.⁹

Why the Length Drives Capital

The assumed window feeds directly into the exposure models that set counterparty credit risk capital. A longer window means the portfolio can drift further before the bank exits, and regulators require more capital to sit behind that drift.

Volatility Scaling

Risk models typically scale daily volatility by the square root of the number of days in the window. A ten-day window uses the square root of ten, roughly 3.16. A twenty-day window uses the square root of twenty, roughly 4.47. The ratio is about 1.41, so the same portfolio carries roughly 41 percent more modeled exposure at a twenty-day floor than at a ten-day floor, holding everything else constant. That is the arithmetic behind why the triggers above are consequential.

Effect on Credit Valuation Adjustment

The window also shapes the CVA, which prices counterparty credit risk. Under the Basel CVA framework, exposure models for margined counterparties must assume the counterparty posts or returns no collateral during the window immediately before an exposure measurement point.⁶ That assumption caps how much collateral counts as a mitigant, so a longer window raises simulated exposure and, in turn, the CVA capital charge.

Internal Estimates and Supervisory Scrutiny

A bank using internal models with estimates below the supervisory floors would understate its exposure and risk being forced onto the standardized approach. The Basel framework treats illiquidity for these purposes in terms of stressed conditions, specifically the absence of markets where multiple quotes could be obtained within two days without moving prices.¹ Banks must also monitor and report concentration in collateral pools, since heavy concentration in a single asset or issuer makes liquidation harder even where an automatic extension does not apply.¹⁰ The tiered floor system exists because banks left to their own assumptions have historically underestimated how long close-outs take under stress.

1
Bank for International Settlements. Standardised Approach to Counterparty Credit Risk
2
U.S. Securities and Exchange Commission. ISDA 2002 Master Agreement
3
Bank for International Settlements. Margin Requirements for Non-Centrally Cleared Derivatives
4
Bank for International Settlements. Internal Models Method for Counterparty Credit Risk
5
Bank for International Settlements. Capital Requirements for Bank Exposures to Central Counterparties
6
Bank for International Settlements. MAR50 – Credit Valuation Adjustment Framework
7
eCFR. 17 CFR Part 23 Subpart E – Capital and Margin Requirements for Swap Dealers and Major Swap Participants
8
eCFR. 12 CFR Part 45 – Margin and Capital Requirements for Covered Swap Entities
9
eCFR. 12 CFR Part 237 – Swaps Margin and Swaps Push-out (Regulation KK)
10
Bank for International Settlements. Standardised Approach – Credit Risk Mitigation