Prior to the credit crisis, interest rate modelling was generally well understood. The underlying fundamental principles had existed for over 30 years with steady evolution in areas that were most relevant to options and complex products.

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.

Buy side firms face a rapidly changing operating environment. They need not only to comply with the regulations, but also to adapt to a new marketplace.

Shawn Stoval discusses the most significant developments in the OTC markets over the last 12 months.