With the support of two global ag trading companies, Quantifi successfully expanded their product footprint to address the valuation complexities unique to the commodity markets. Now, with several hedge funds and global-scale commodity trading firms using their products to manage counterparty credit risk and analytics in the softs and ags markets (and with plans to move into metals and energies), Quantifi has become a recognized player in the industry. Read More
In this article, Dmitry Pugachevsky, Director of Research, analyses the results of this survey and discusses whether banks are ready for counterparty risk elements of Basel lll. Basel III significantly changes the way in which financial institutions address counterparty credit risk (CCR) and credit value adjustment (CVA). 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 the way banks price and manage the risk associated with derivatives.
The global financial crisis brought counterparty credit risk and credit value adjustment (CVA) very much into the spotlight. The Basel III proposals first published in December 2009 introduced changes to the Basel II rules including a new capital charge against the volatility of CVA. As the Basel committee noted, two thirds of the counterparty risk related losses during the credit crisis were actually from CVA volatility rather than defaults. Not surprisingly then, the new CVA ‘VaR capital charge is quite punitive and worthy of focus.
This week’s Learning Curve was written by David Kelly, Director of Credit Products, and Dmitry Pugachevsky, Director of Research, at Quantifi.
Credit value adjustment is the amount subtracted from the mark-to-market (MTM) value of derivative positions to account for the expected loss due to counterparty defaults. CVA is easy to understand in the context of a loan–it is the loan principal less anticipated recovery, times the counterparty’s default probability over the term of the loan. For derivatives, the loan amount is the net MTM value of derivative positions with that counterparty.
In this article, David Kelly, Director of Credit Products at Quantifi, discusses how the credit crisis and regulatory responses have forced banks to update their counterparty risk management processes substantially. New regulations in the form of Basel III, the Dodd-Frank Act in the U.S. and European Market Infrastructure Regulation (EMIR) have dramatically increased capital requirements for counterparty credit risk. 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?
Quantifi explores the key challenges for banks in the implementation of counterparty risk management, focusing on data, technology and operational issues in the context of current trends and best practices.
Most banks are in the process of setting up counterparty risk management processes or improving existing ones. Unlike market risk, which can be effectively managed by individual trading desks or traders, counterparty risk is increasingly being priced and managed by a central credit value adjustments (CVA) desk or risk control group since the exposure tends to span multiple asset classes and business lines. Moreover, aggregated counterparty exposure may be significantly impacted by collateral and cross-product netting agreements.
In this article, CSI speak to Rohan Douglas, CEO of Quantifi, regarding how Quantifi operates and also engage in discussions around market challenges and developments.
Q: How do you differentiate yourself from your competitors?
A: One differentiating factor is that our technology infrastructure was built from the ground up. Whereas other vendors may offer, for example, add-on scenario analysis functions, we can produce faster results because it has always been an integral part of the risk engine. Equally, our analytics library was built on a .Net platform, so performance has always been a key element of the product. Another differentiator is that we bring on board experienced people from the industry, so we better understand the nature of our clients' needs.
The measurement and management of counterparty risk is in the midst of a revolution. Within recent memory of most counterparty risk managers it all used to be so much simpler. Limits were set on the same basis as traditional lending, and exposure measured against those limits was quantified using simple add-on factors applied to the notional of each transaction. Regulatory capital was based on the simple methodology which has been specified under Basel I.
In this article, Dr. Dmitry Pugachevsky, Director of Research, Quantifi & Rohan Douglas, CEO, Quantifi and Jean-Roch Sibille, Manager, Risk Dynamics & Aurelie Civilio, Senior Consultant, Risk Dynamics discuss the conditions for the effective risk management of Counterparty Credit Risk (CCR) by detailing and comparing capital requirements, identifying inconsistencies in prudential regulations and applying the various capital approaches on some typical portfolio strategies observed within financial institutions.
Quantifi has announced the release of their whitepaper titled ‘How Blockchain Could Change the Financial Markets’. The paper was co-written with Noble Markets, a provider of post-trade technology for the OTC markets and OKCoin, a leading blockchain technology company. The paper focuses on two important areas for financial markets – blockchain’s impact on financial transactions (OTC derivatives, syndicated loans) and risk management. read more