by Avadhut Naik (Quantifi) and Sol Steinberg (OTC Partners)
The financial markets have undergone dramatic change. While some of this is down to natural evolution, much of the change can be directly attributed to new rules introduced in the wake of the 2007 crisis. The combination of the Dodd-Frank Act, EMIR, MiFID ll and Basel lll signify the biggest regulatory change in decades. These reforms have triggered major change in how financial products are traded, settled, collateralized and reported, resulting in deep ongoing structural changes to the markets.
The credit crisis and regulatory responses have forced banks to substantially update their counterparty risk management processes. New regulations in the form of Basel III, Dodd-Frank and European Market Infrastructure Regulation (EMIR) have dramatically increased capital requirements for counterparty credit risk. In addition to implementing new regulatory requirements, banks are making significant changes to internal counterparty risk management practices. This whitepaper explores some of the key changes to internal counterparty risk management processes by tracing typical workflows within banks before and after CVA desks, and how increased clearing due to regulatory mandates affects these workflows.