What Is the Risk of 'Wrong-Way' Correlation in a Portfolio Margining System? ⎊ Path

What Is the Risk of ‘Wrong-Way’ Correlation in a Portfolio Margining System?

Wrong-way correlation (WWC) is the risk that the exposure to a counterparty increases at the same time as the counterparty's creditworthiness decreases. In portfolio margining, this means that the risk-reducing correlation assumptions used in the model break down during a market crisis, leading to simultaneous losses on all positions and a massive, unexpected margin shortfall.

WWC is a major tail risk.

How Does the Correlation between Assets Affect the Effectiveness of Cross-Margining?

What Is the Impact of a High Correlation Assumption on Cross-Margining Benefits?

How Can Using a Counterparty’s Own Stock as Collateral Create Wrong-Way Risk?

How Is Portfolio Margining Different from Simple Cross-Margining?

How Does the Correlation between Assets Affect the Benefits of Cross-Margining?

How Do the Capital Benefits of Portfolio Margining Compare to Traditional ‘Gross’ Margining?

What Types of Derivatives Positions Are Considered ‘Offsetting’ for Margin Purposes?

How Does Portfolio Margining Potentially Reduce Overall Margin Requirements?