ICE Risk Model 2 (IRM 2) utilizes a Filtered Historical Simulation (FHS) Value-at-Risk (VaR) approach that models the behavior of a portfolio as a whole rather than measuring risk on an instrument by instrument basis. IRM 2 leverages a portfolio-level perspective by capturing all relationships and diversifying effects within a portfolio.

IRM 2 follows four calculation steps to generate the base margin. The first step is a transformation of market data objects from the original instruments to coherent set of risk factors. A risk factor may be in price, rate and volatility required to price all types of traded futures and options. These risk factors are then scaled to generate risk scenarios which reflect the current market conditions. IRM 2 then applies relevant pricing functions to convert the risk factor scenarios back to the instrument P&L. In the final step of the calculation, all individual instrument P&Ls are aggregated up to the portfolio to generate the P&L distribution over the lookback window from which to compute the Value at Risk at the target confidence level.

The final IRM 2 margin incorporates additional margin components including correlation stress charge, diversification benefit cap, anti-procyclicality, seasonality adjustment and volatility floor to achieve full regulatory compliance and prudent risk management objectives.