System and Method for Determining the Market Risk Margin Requirements Associated with a Credit Default Swap

A computer readable memory including instructions for determining a multi-factor risk margin requirement associated with a portfolio comprising one or more positions with respect to a plurality of financial instruments, that when executed on a computer are operable to cause the computer to:

• receive a plurality of data associated with the plurality of financial instruments within the portfolio;
• determine a first time-series of returns for the first portion of the plurality of financial instruments;
• determine a second time-series of returns for the first portion of the plurality of financial instruments, wherein the second time-series occurs after the first time-series;
• calculate a correlation between the first time-series of returns and the second time-series of returns;
• calculate residuals and volatilities for the first portion of the plurality of financial instruments within the portfolio as a function of the first time-series of returns;
• calculate a first risk value based on the correlation, the residuals, and the volatilities;
• and
• calculate a multi-factor risk margin requirement based on at least the first risk value.

A system for determining a margin requirement associated with a plurality of credit derivatives within a portfolio, the system comprising:

• a memory operable to store a plurality of data associated with the plurality of financial instruments within the portfolio;
• a processor, in communication with the memory, and configured to:
• determine a first time-series of returns for the first portion of the plurality of financial instruments;
• determine a second time-series of returns for the first portion of the plurality of financial instruments, wherein the second time-series occurs after the first time-series;
• calculate a correlation between the first time-series of returns and the second time-series of returns;
• calculate residuals and volatilities for the first portion of the plurality of financial instruments within the portfolio as a function of the first time-series of returns;
• calculate a first risk value based on the correlation, the residuals, and the volatilities;
• and
• calculate a multi-factor risk margin requirement based on at least the first risk value.