OTC MARKET NEWS Powered By Quantifi

Research

A First View on the New CVA Risk Capital Charge

- Quantifi & d-fine

​The recently published consultative document ‘Review of the Credit Valuation Adjustment (CVA) risk framework’ by the Basel lll Committee introduces new approaches for the calculation of regulatory capital. This white paper explores the effect of two of the new regulatory methods introduced in the consultative paper.

The new approaches considered are aligned to the CVA calculations under IFRS and the market risk framework under the Committees’ Fundamental Review of the Trading Book (FRTB). For several test portfolios we calculate CVA risk capital charges according to the different approaches and compare the results in the new regime to current Basel III capital charges. From this comparison we found that the changes in the calculation methodologies have a significant effect on the capital charge.

...........................................................................................

 

Basel III Framework: The Credit Valuation Adjustment (CVA) Charge for OTC Derivatives Trades

- Shearman & Sterling LLP

The credit valuation adjustment charge in Basel III appears, at first glance, to be the preserve of quantitative analysts and the like. However, while complex, the CVA charge requires more widespread attention as it materially increases the required capital for OTC derivative trading activities and is driving significant change in that sector. The divergence between the US and EU approaches to the adoption of the CVA charge highlights how the Basel standards have been interpreted differently in this important area, creating uncertainty and opportunities for arbitrage. 

Two-thirds of counterparty credit losses in the financial crisis were suffered not as a result of actual defaults of the counterparty, but because credit market volatility negatively impacted bank earnings. In response, the Basel Committee on Banking Supervision (“Basel Committee”) introduced a new capital charge in Basel III, the credit valuation adjustment (the “CVA”) charge, aimed at improving banks’ resilience against potential mark-to-market losses associated with deterioration in the creditworthiness of counterparties to non-cleared derivatives trades. The CVA charge applies to non-cleared trades as exposures toward central counterparties (“CCP”) are exempt from the CVA charge.

...........................................................................................

 

Capital Requirements Directive IV Framework, Credit Valuation Adjustment (CVA)

- Allen & Overy, Client Briefing Paper

This briefing paper is part of a series of briefings on the implementation of Basel III in Europe via the Capital Requirements Directive IV1 (CRD IV) and the Capital Requirements Regulation2 (CRR), replacing the Banking Consolidation Directive3 and the Capital Adequacy Directive. 

The global financial crisis has prompted legislators and regulators to introduce reforms and strengthen existing legislation to address perceived weaknesses in derivatives markets. These reforms include a number of measures aimed at reducing counterparty credit risk including more robust back-testing and stress testing, the requirement for certain derivatives contracts to be cleared through a central counterparty (CCP), increased capital requirements and, to the extent derivatives contracts are not cleared, increased collateral and even higher capital requirements (thus incentivising central counterparty clearing). This briefing paper will focus on capital requirements and, in particular, the new requirements in respect of CVA risk.

...........................................................................................

CVA Capital Charge under Basel III standardized approach - An explanation document

- Chappuis Halder & Cie

Since the 2007 – 2009, Counterparty Credit Risk (CCR) has become one of the biggest issues and challenges for financial institutions. As the crisis revealed shortcomings and loopholes in managing CCR, and more specifically CVA risk, new regulations have been issued in the sole intent of capturing this risk and building an extra cushion of capital to absorb losses and consequently to strengthen the resilience of the banking industry.

Basel III framework proposes two ways for measuring CVA Risk: a standardized approach and an advanced approach.

In this paper, the standardized approach will be analyzed and studied. At first, an analysis will be provided to better understand why CCR became so important, what are its characteristics, etc…. Then a discussion around the CVA definition from the regulator’s perspective will be presented. Finally, a paragraph will be dedicated to better understand what the standardized formula refers to, what is being computed, and for what purpose. 

...........................................................................................

Optimal Funding Strategies for Counterparty Credit Risk Liabilities

- Claudio Albanese, Giacomo Pietronero, Steve White

The Dodd-Frank Act [9] and the recently proposed Basel Committee regulatory framework for CCPs [15] are a game changer for counterparty credit risk management. The practice of charging an upfront fee as a Credit Valuation Adjustment (CVA) to provision against counterparty credit risk liabilities is being abandoned as it was deemed responsible for as much as two thirds of the losses recorded during the financial crisis. Instead, a key role will be played by margin financing, whereby periodically marked-to-market revolving lines of credit are used to cover margin variations on a cross-product basis.The emerging pay-as-you-go funding strategy for counterparty credit risk liabilities has a fair value equal to the CVA upfront fee but an entirely different risk profile. 

...........................................................................................

 

Making Sense of Global OTC Derivatives Infrastructure: Markets, CCPs, and Platforms

- Aite Group

The 2009 G-20 mandate to transform OTC derivatives markets has resulted in an overabundance of new players and a plethora of connectivity paths. What used to be a hub-and-spoke manual infrastructure between sell-side and buy-side has fractured into a spider's web of connectivity. With each additional regulatory variation and latency across G-20 member countries' regulatory efforts, the new regionalized OTC derivatives environment gets more and more complex. Is there any hope to ease the formation of these new connectivity webs? 

This Aite Group Impact Report is based on data gathered throughout 2014 from markets, CCPs, and platforms that currently process OTC derivatives transactions across the globe or plan to do so and describes how they are maximizing their individual liquidity within the new electronic infrastructure. 

...........................................................................................

Understanding Credit Risk Profiles of Over-the-Counter Derivatives Transactions

- GARP

OTC derivative transactions carry a huge amount of credit risk. R. Sathis Kumar explores the risks involved for both parties in these deals, and explains how these risks can be calculated.

...........................................................................................

IFRS 13 - Accounting for CVA & DVA

- Quantifi & Deloitte

IFRS 13 “Fair Value Measurement” became effective 1st of January 2013. The International Accounting Standards Board (IASB) issued IFRS (International Financial Reporting Standards) 13 in May 2011 to improve the consistency of fair value measurements. With the introduction of IFRS 13, the requirements for calculating complex variables including CVA and DVA remain. IFRS13 has significant implications for all firms, including corporates that measure financial assets at fair value. This joint Quantifi and Deloitte whitepaper explores the challenges, risk factors, calculation techniques, and concepts for measuring financial instruments under IFRS13.

IFRS 13 establishes a single source of guidance for fair value measurements for all financial instruments. It clarifies the definition of fair value in general as an exit price and enhances disclosures about all fair value measurements.

...........................................................................................

Funding Valuation Adjustment (FVA), Part 1: A Primer

Quantifi

Understanding trade profitability becomes critical with banks now pricing all the components of a trade including the model value using the appropriate discounting curve, the Credit Valuation Adjustment (CVA), the Cost of Regulatory Capital (CRC) and most recently the Funding Valuation Adjustment (FVA).

Accurately pricing CVA, CRC and FVA for a single trade requires taking into account all trades done with that counterparty, along with the collateral posted or received as part of any CSA. This presents new challenges for OTC businesses that have traditionally been siloed within banks. This challenge has driven a trend towards central measurement and management of these components by CVA desks with various strategies for allocating the P/L and risk of a trade between each trading desk and the CVA desk.

Funding Valuation Adjustment

The FVA is the latest significant innovation in measuring trade profitability and captures the impact of funding and liquidity on the cost of a trade. This cost depends on the nature of the CSA (for example is the trade collateralised, uncollateralised, or one-way) and the net collateral posted or received.

To understand FVA we’ll look at both collateralised and uncollateralised swaps.

...........................................................................................

Should banks charge for FVA?

- Quantifi

Interest on the topic of Funding Valuation Adjustment (FVA) was recently renewed, particularly in light of the JPMorgan’s (JPM) Q4 2013 earnings report on January 14th 2014, which for the first time included FVA.

JPM, during the investor presentation, explained the adoption of FVA. All of these points are consistent with the definition of FVA, which Quantifi presented in the previous articles. To recap, FVA arises when the bank has an unsecured trade with a counterparty and hedges it, via a secured trade, with a riskless counterparty. In which case if PV of the trade is positive, PV of the hedge is negative, and to cover margin/collateral call the bank has to borrow cash at its funding rate LIBOR+s where ‘s’ is a funding spread. The trade, and therefore funding, terminates if the bank or a counterparty defaults. FVA is the expected value of the funding cost. It can be expressed as expectation of the bank’s funding spread applied to positive PV (discounted to today) until deal maturity, or early termination due to bank or counterparty default.

...........................................................................................

Survey Reveals Banks Are Not Ready for Counterparty Risk Elements of Basel lll

- Quantifi and EY Survey

Enhancing counterparty credit risk management practices is a key focus for banks. This is in response to changes in accounting rules and new prudential and market regulations which have tightened substantially following the financial crisis. Collectively, these changes are having a deep impact on the market and have driven banks to invest significantly in better pricing and reporting capability and in the active management of counterparty credit risk.

“Regulatory mandates continue to drive change and will have a major impact on OTC businesses for most banks. Not only does it change the way in which banks address counterparty credit risk and credit value adjustment (CVA), it will also require them to undertake significant process and system changes,” comments Dmitry Pugachevsky, Director of Research, Quantifi. “New minimum capital ratios will drive new methods of measuring and allocating capital as banks will be required to hold more capital and higher quality of capital to cover CVA risk.”

...........................................................................................

Quantifi and InteDelta Whitepaper: Measurement and Management of Counterparty Risk

InteDelta

The measurement and management of counterparty risk is a rapidly evolving area. A range of new regulatory requirements is changing the way in which institutions view risk. This affects not only risk quantification but the whole commercial model of an institution. New regulations or risk measures can affect the commercial attractiveness of an institution’s existing product range or client profile. Against a backdrop of discipline in constant evolution, this whitepaper explores some of the key areas associated with the management and measurement of counterparty risk.

............................................................................................

The Overhaul of Interest Rate Modelling

- TabbFORUM

A new generation of interest rate modelling is evolving, as an approach based on overnight indexed swap discounting and integrated credit valuation adjustment is becoming the market consensus.

Prior to the credit crisis, interest rate modelling was generally well understood. Credit and liquidity were ignored, as their effects were minimal. Pricing a single currency interest rate swap was straightforward: A single interest rate curve was calibrated to liquid market products, and future cash flows were estimated and discounted using this single curve.

Today, a new interest rate modelling framework is evolving based on overnight indexed swap, or OIS, discounting and integrated credit valuation adjustment (CVA). Pricing a single currency interest rate swap now takes into account the difference between projected rates such as Euribor that include credit risk and the rates appropriate for discounting cash flows that are risk-free or based on funding cost. This approach is referred to as OIS discounting. In addition, the counterparty credit risk of (uncollateralized) OTC transactions is measured as a CVA.

Authored by Rohan Douglas, Quantifi

............................................................................................

Maximizing Collateral Advantage: A Survey of Buy Side Business and Operational Strategies

- Celent

Abstract

It will cost the financial industry in excess of $53 billion in infrastructure and technology investments to upgrade and source new capabilities to achieve collateral efficiency and operational efficiency in a mixed clearing and collateralization environment.

In this report, based on a survey by Celent and commissioned by Omgeo, Maximizing Collateral Advantage: A Survey of Buy Side Business and Operational Strategies, Celent examines the state of buy side collateral management capabilities to understand how senior executives, practitioners, and industry experts from asset managers, hedge funds, insurance asset management units, and pension funds envisage the future of their collateral operations/IT, and how their organizations are formulating strategies towards their goals.

Firms are likely to be impacted in the way they hedge and trade derivatives; more than half of institutional investors surveyed stated that market reforms would materially change their trading behavior and asset allocation activities.

Authored by Cubillas Ding, Celent

............................................................................................

Quantifi and Risk Dynamics Whitepaper - Optimising Capital Requirements for Counterparty Credit Risk

- Risk Dynamics

This paper explores how to deal with counterparty credit risk in the current financial environment by detailing some of the associated aspects and challenges. It also studies the conditions for effective management of counterparty credit risk. In a joint effort, Quantifi and Risk Dynamics compare capital requirements, identify inconsistencies in prudential regulations and apply the various capital approaches on typical portfolio strategies observed within financial institutions.

There is currently a strong market focus on counterparty credit risk and more specifically on Credit Value Adjustment (CVA). The attention is predominantly towards the issue of efficient CVA pricing as opposed to implications in terms of risk management and capital requirements. However, since the recent crisis, another issue has gained prominence; the significant losses that counterparty credit risk can cause if not correctly managed.

Authored by Rohan Douglas, CEO Quantifi, Dr. Dmitry Pugachevsky, Director of Research, Quantifi, Dr. Jean-Roche Sibille, Risk Dynamics, and Aurelie Civilio, Risk Dynamics. 

............................................................................................

Quantifi Whitepaper - Comparing Alternative Methods for Calculating CVA Capital Charges Under Basel III

- Quantifi

The global financial crisis brought counterparty credit risk and CVA very much into the spotlight. The Basel III proposals first published in December 2009 introduced changes to the Basel II rules and the need for a new capital charge against the volatility of CVA. This ‘CVA VaR’ capital charge was always likely to be punitive since the Basel committee considered that it referenced two thirds of counterparty risk related losses. However, there are two ways for banks to compute CVA VaR, so-called standardised and advanced methods, which depend on their current regulatory approval with respect to other aspects. Furthermore, there is the potential to reduce the capital charges via eligible hedges. This paper aims to explore the capital charges under the two regimes and the capital relief that can be achieved.

Authored by Dmitry Pugachevsky, Director of Research, Quantifi, Rohan Douglas, CEO, Quantifi and Jon Gregory

............................................................................................

Reflecting credit and funding adjustments in fair value

- Ernst & Young

There can be little doubt that determining the fair value of derivatives contracts continues to be one of the key issues for the banking sector in 2012. The continuing financial crisis has led to significant changes in the valuation of derivative contracts, with a number of banks introducing new valuation methodologies over the last two years as assumptions which held true in the pre-crisis era have lost their validity. The new IFRS accounting standard on fair value measurement, and the new charge under Basel III related to valuation adjustments as a result of credit, also mean that institutions have to fundamentally rethink their approach to managing counterparty credit risk.

The fair value question has, of course, been high on the agenda for some time now. In the autumn of 2010, we surveyed a number of financial institutions to identify emerging trends and noted different approaches taken in relation to credit adjustments when determining the fair value of derivative contracts and issued debt instruments.

.........................................................................................

Countering the Risk of Counterparties: Emerging Trends, Practices, and Technology in CVA Management

- Celent

Globally, Celent expects firms to spend in excess of $850 million in 2012 on counterparty risk and CVA management systems, rising at a CAGR of 9.6% to $1.1 billion in 2015.

The strategic importance of credit value adjustment (CVA) and counterparty credit risk (CCR) management was brought to the forefront during the recent financial crisis. Virtually all active CVA groups faced major challenges in managing profit and loss volatility, with many tier 1 broker-dealers seeing significant losses from their CVA books. In a new report, Countering the Risk of Counterparties: Emerging Trends, Practices, and Technology in CVA Management, Celent finds that, despite considerable reform efforts, adverse conditions have not gone away. However, CVA management practices are advancing considerably in scope and depth.

........................................................................................

Basel III: Issues and Implications White Paper

- KPMG

Summary of key details of the Basel III capital adequacy framework and exploration of some practical implications and considerations for firms to establish an effective and efficient implementation procedure.

In the aftermath of the financial crisis of 2008–2009, the Basel Committee of Banking Supervision (BCBS) embarked on a program of substantially revising its existing capital adequacy guidelines. The resultant capital adequacy framework is termed ‘Basel III.’ The G20 endorsed the new Basel III capital and liquidity requirements at their November 2010 Summit in Seoul. There are many areas of detail needing further development, and worldwide debate and lobbying will inevitably continue—most notably in relation to the whole issue of systemically important financial institutions (SIFIs). The core principles, however, are set, and complying with the Basel III framework is inevitable.

.......................................................................................

How the Credit Crisis has Changed Counterparty Risk Management

- GARP

CVA desks have been developed in response to crisis-driven regulations for improved counterparty risk management. How do these centralized groups differ from traditional approaches to manage counterparty risk, and what types of data and analytical challenges do they face?

By David Kelly, Director of Credit, Quantifi. Originally published in the December 2011 issue of GARP's Risk Professional magazine.

.......................................................................................

AFME, ICMA and ISDA Publish Paper Analyzing the Impact of European Sovereigns’ Collateral Policies

- ISDA

The Association for Financial Markets in Europe (AFME), the International Capital Market Association (ICMA) and the International Swaps and Derivatives Association, Inc. (ISDA) today announced the publication of a paper titled “The Impact of Derivative Collateral Policies of European Sovereigns and Resulting Basel III Capital Issues”.

The paper discusses and analyzes the impact of the collateral policies of European sovereigns. It identifies that such policies could significantly affect the liquidity and dynamics of the credit default swaps (CDS) market and create substantial additional bank liquidity requirements. The paper estimates European sovereign collateral policies may drive a significant percentage – approximately half - of the volume in the sovereign CDS market.​

......................................................................................

OTC Derivatives Reforms in Asia: Challenging for the Buy Side

- Celent

​In a new report, OTC Derivatives Reforms in Asia: Challenging for the Buy Side, Celent studies the move to centralized clearing and its impact on market participants, including the buy side. The Asian central clearing model is going to be slightly different than the models in the US and Europe. In those markets, there are norms for the trading of standardized OTC products. Hence, it is expected that trading will take place on a regulated platform and that the CCP would undertake the clearing for such trades. In Asia, however, there are no regulations governing the move of trading to regulated platforms, and trading is still expected to happen in a bilateral manner. ​

......................................................................................

CVA, DVA and Bank Earnings

- Quantifi

The paper provides an overview of DVA and highlights some of the results reported by larger banks, along with potential implications going forward. The paper addresses the following:

  • The meaning of DVA and how it relates to CVA
  • Q3 DVA results for the five largest U.S banks, along with the increases in their respective CDS spreads that drove these gains
  • The subsequent tightening of spreads during October and the estimated monthly DVA loss
  • How much the DVA could move during Q4 due to movements in market factors other than credit spreads
  • How some banks hedge DVA in order to reduce earnings volatility​

......................................................................................

Managing Credit Risk by Counterparty Selection

- Quantifi

In cases where counterparties, e.g., prime brokers, do not post collateral and CDS protection is prohibitively expensive, hedge funds tend to manage credit risk through counterparty selection. This typically entails choosing the counterparty with the lowest aggregate current exposure (mark-to-market value) for the next OTC transaction. The problem with this approach is that it doesn’t take into account the potential level of current exposure on future dates. This paper will step through an example where choosing a counterparty with lower current exposure can result in greater counterparty risk.

......................................................................................

Dodd Frank and EMIR Derivatives Reform

- Celent

Over the years, derivatives pricing and valuation practices have been shaped by both industry initiatives and regulations around capital adequacy, risk management, accounting standardization, and OTC derivatives trade processing and risk control objectives. Even before the 2008 financial crisis, there were discernible trends towards needing to align derivative pricing and portfolio valuation activities in order to strengthen front office pricing practices, achieve accurate valuations for off-balance sheet items on a mark-to-market basis, manage efficient collateralization, and improve governance and transparency to various internal/external stakeholders. With the impending implementation of Dodd Frank and EMIR on the horizon, these trends are not expected to slow down.

......................................................................................

Counterparty Credit Risk Management in the US Over-the-Counter (OTC) Derivatives Markets Part II

- ISDA

ISDA examined SEC filings of 12 US bank holding companies and international banking companies from 2007 to 2010. The purpose was to produce an estimate of the charges taken by banks on their exposures to monoline insurance companies. This insurance was primarily written on the performance of CDOs on residential mortgage backed securities (RMBS) with large components of subprime risk. As we went through our analysis, we found that the monolines had also insured CDOs of CMBS, home equity loans, RMBS in forms other than CDOs, and auction-rate floating rate securities. The banks in our sample generally did not differentiate between types of exposures to monolines and so the losses and exposures contained in this paper will be total losses and exposures rather than being limited to CDOs of RMBS.

.....................................................................................

Dodd-Frank and EMIR Derivatives Reforms

- Celent

In a new report, Dodd-Frank and EMIR Derivatives Reforms: Future Scenarios and the Impact on Derivatives Technology, Celent employs a dynamic approach to predict the market structure and market environment to help clients make more informed strategic choices into 2012 and beyond. This report examines overall IT spending and likely areas of IT investment at major industry players, including swaps dealers, non-dealers, asset managers, hedge funds, and CCPs.

.....................................................................................

Tall Order: Banks ready CVA infrastructure, strategies ahead of Basel 3

- SCI

The advent of Basel 3 significantly changes the way in which financial institutions address counterparty credit risk(CCR) and credit value adjustment(CVA). While a small number of banks are geared up for the regulatory changes and are actively managing CVA, the complexity and cost of implementing the necessary infrastructure remains a daunting task for the majority.

.....................................................................................

OTC Derivatives Clearing and the Buy Side in the US: Rough Ride Ahead

- Celent

The overhauling of the OTC derivatives market in the form of the Dodd-Frank Act (DFA) has brought about a sea change in the clearing environment. The legislation is expected to ensure greater transparency and accountability in the system. However, the move from bilateral to counterparty clearing will require a great deal of resources on the part of market participants, especially the buy side. In a new report, OTC Derivatives Clearing and the Buy Side in the US: Rough Ride Ahead, Celent looks at the impact of the DFA on the US OTC derivatives market

.....................................................................................

How Bank's Collateral Management Department are Preparing for Dodd-Frank

- InteDelta

The overhauling of the OTC derivatives market in the form of the Dodd-Frank Act (DFA) has brought about a sea change in the clearing environment. The legislation is expected to ensure greater transparency and accountability in the system. However, the move from bilateral to counterparty clearing will require a great deal of resources on the part of market participants, especially the buy side. In a new report, OTC Derivatives Clearing and the Buy Side in the US: Rough Ride Ahead, Celent looks at the impact of the DFA on the US OTC derivatives market

.....................................................................................

Day of Reckoning? New Regulation and its Impact on Capital Markets Businesses

- McKinsey & Company

The financial crisis of 2008–09 has prompted a wave of banking reform. Massive new regulatory packages have been agreed upon in Europe and the United States, and regulators and bankers are now rolling up their sleeves to prepare for the next phase of compliance and implementation. Banking leaders are keen to understand the complexities of proposed reforms and their impact on different businesses. They are especially interested to know the effects on those businesses that are the subject of the stiffest reforms.

.....................................................................................

Technology and Financial Reform: Data, Derivatives and Decision Making

- TABB Group 

The TABB Group Vision Note Technology and Financial Reform: Data, Derivatives and Decision Making examines the technological challenges and opportunities presented by global OTC derivatives reform.  Based on conversations top-tier swaps dealers, buy-side firms, exchanges, clearinghouses and swap-execution facilities the study also examines the primary drivers behind the impending data explosion, related business concerns and the various approaches being taken by the market to adapt.

.....................................................................................

Analysis of Counterparty Credit Risk Management in the US OTC Derivatives Markets

- ISDA

The International Swaps and Derivatives Association, Inc. (ISDA) published a new analysis of counterparty credit risk management in the US over-the-counter (OTC) derivatives markets. The paper examines the extent of counterparty credit losses and notes the efficacy of credit mitigation techniques in the US banking system.

....................................................................................

Challenges in Implementing a Counterparty Risk Management Process

- Quantifi

This whitepaper explores the key challenges for banks in the implementation of counterparty risk management. It focuses on data, technology and operational challenges, in the context of current trends and best practices.

....................................................................................

Mapping Global Capital Markets

- McKinsey & Company

The 2008 financial crisis and worldwide recession halted an expansion of global capital and banking markets that had lasted for nearly three decades. Over the past two years, growth has resumed. This research provides a fact base on how the world's financial markets are recovering.

....................................................................................

Top 5 Issues Facing OTC Derivative Investors Post Dodd-Frank

- Citigroup

This whitepaper identifies and discusses the five key issue facing investors in the wake of the Dodd-Frank reforms. The paper - Ready or Not? Here It comes: OTC Derivatives in the Post Dodd-Frank Landscape - Implications for Investment Managers - suggests that about 60% of the current over the counter (OTC) derivatives market by volume will be centrally cleared because of the new rules under Dodd-Frank.

....................................................................................

Impact of the Dodd-Frank Act on OTC Derivatives: Challenges Reign

- Aite

This report addresses the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (aka FinReg) on over-the-counter (OTC) derivatives, and discusses outstanding issues associated with its implementation.

....................................................................................

OIS and CSA Discounting
- Quantifi

A new generation of interest rate modelling based on dual curve pricing and integrated CVA is evolving. This new framework requires a rethink of derivative modelling from first principles and presents significant challenges for existing valuation, risk management, and margining systems. This whitepaper looks at how the interest rate modeling framework is evolving.

....................................................................................

The Evolution of Counterparty Credit Risk

- Quantifi

Although the recent crisis has brought a heightened focus, counterparty credit risk theory and practice have been evolving for over a decade. This whitepaper traces the evolution of counterparty credit risk based on actual experiences within banks that have had considerable influence.

....................................................................................

Portfolio and Risk Management Systems: Trends, Priorities, and Technology Strategies

- Celent

In a new report series, Portfolio and Risk Management Systems, Celent examines how market risk and trading functions continue to evolve, as well as what solutions and capabilities financial firms are moving towards.

....................................................................................

Assessing Impact of the Dodd-Frank Act on Derivatives Markets

- Celent

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a vital piece of legislation that will come into full effect over the next few years. Its impact will be far-reaching, and it is expected to be as important for the financial services industry as the Glass-Steagall Act of 1933.

In a new report, Assessing Impact of the Dodd-Frank Act on Derivatives Markets: Change Is in the Air, Celent describes the implications of the Act on the derivatives markets and its leading participants.

....................................................................................

Getting to Grips with Counterparty Risk
- McKinsey & Co

Counterparty risk after the crisis is now in the same league as market and liquidity risk. Rather than relying on new regulation, banks should better their own lot.

Not since the Great Depression have banks been so nervous about each other. Starting with the failure of Lehman Brothers in September 2008, through the near-collapse of the banking system in the United States, the United Kingdom, and Europe, and continuing to this day with the wobbles of CIT, a big mid-market lender, counterparty risk has stalked the banking system. Total global defaults on debt were $430 billion in 2008, up from just $8 billion in 2007. Most of this was in the financial sector, making it a particular problem for banks, insurers, and other financial institutions. For these firms, counterparty risk is now in the same league as market and liquidity risk.

....................................................................................

Gaining From Your Own Default: Counterparty Credit Risk and DVA

- InteDelta

A trend that has become increasingly relevant for financial institutions to consider is the bilateral nature of counterparty risk. This involves quantifying counterparty risk under the assumption of one’s own default where a defaulting institution “gains” on any outstanding liabilities that need not (cannot) be paid in full. This component is often named DVA (Debit Valuation Adjustment) and is the mirror image of the more commonly known unilateral CVA (Credit Valuation Adjustment).

....................................................................................

Credit Risk Management: Challenges and Opportunities in Turbulent Times

- SAS

In times of market turmoil, several weaknesses of risk management systems that had been developed in relatively benign market environments have become apparent. As a consequence, the challenge today consists of refining and enlarging the traditional credit risk management repertoire on the one hand, and being more creative in the modelling and management of innovative credit products on the other hand. Furthermore, a successful risk management system will allow for the interdependencies between credit risk, liquidity risk and market risk and will contrast various quantitative analyses with qualitative considerations. This white paper focuses on the credit risk management part of an integrated enterprise risk management system.

 

Subscribe

Submit your email to receive our newsletter

GO

 

 

celent logo