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.
Given current market practices around counterparty risk regulation, xVA management, funding and accounting, Helaba, one of the leading German banks, decided it needed to enhance its counterparty risk infrastructure for their OTC derivatives business. To support this initiative the bank wanted to pair their existing risk and core trading infrastructure with a modern, enterprise-wide XVA solution. The ability for senior management to get a comprehensive view of the bank's counterparty risk was one of the key priorities.
One of the largest asset and wealth managers in the world was looking for a single front-to-administrator solution for trading and risk management to address growth, market changes, and regulatory requirements including MiFID, EMIR, and Dodd-Frank for one of its premier funds. After a 5 month review of alternative internal and external solutions, Quantifi proved to be the clear leader, as it offered all the functionality best matching the client’s stringent requirements.